Auctions in financial markets

Abstract

In this article I discuss how auctions and tools developed for their empirical analysis can inform empirical analysis of financial markets. Since virtually all markets organized as auctions have well-specified and known rules that map nicely into game-theoretical models, I demonstrate using several applications that one can often leverage particular details to study issues that have nothing to do with the auction per se. To do so, I first review an estimation method, which is widely applicable in many settings where a researcher needs to recover agents’ beliefs, in order to establish a link between observables and unobservables using some version of a necessary condition for optimality. I then discuss applications to quantification of front-running, evaluation of quantitative easing operations and estimation of a demand system for financial products.