Price Elasticity of Demand and Risk-Bearing Capacity in Sovereign Bond Auctions

The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds toquantify the price elasticity of demand. The price elasticity of demand correlates stronglywith the volatility of returns of the same bonds traded in the secondary market but onlyweakly with their bid-ask spread. It predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests thatthe price elasticity of demand is associated with the magnitude of price pressure in thesecondary market around auction days and proxies for primary dealer risk-bearing capacity.