Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-25T08:16:41.816Z Has data issue: false hasContentIssue false
  • English
  • Français

Underpricing in Discriminatory and Uniform-Price Treasury Auctions

Published online by Cambridge University Press:  06 April 2009

David Goldreich
David Goldreich
Affiliation:
[email protected], University of Toronto, Rotman School of Management, University of Toronto, 105 St. George St., Toronto, Ontario, M5S 3E6, Canada
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper compares the newer uniform-price U.S. Treasury auctions to the traditional discriminatory mechanism and examines the extent to which the auction mechanisms are responsible for underpricing. Empirically, I find that even for the newer uniform-price auctions, the average price received by the Treasury is less than the price of the same securities in the concurrent secondary market although this underpricing is reduced by half relative to the older mechanism. From the summary statistics released by the Treasury, I calibrate common value auction models for the two mechanisms and predict the level of underpricing in each auction. I find that the observed magnitude of underpricing in the auctions is consistent with the model's predictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 2 , June 2007 , pp. 443 - 466
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ausubel, L., and Cramton, P.. “Demand Reduction and Inefficiency in Multi-Unit Auctions.” Working Paper, University of Maryland (2002).Google Scholar
Back, K., and Zender, J.. “Auctions of Divisible Goods: On the Rationale for the Treasury Experiment.” Review of Financial Studies, 6 (1993), 733–764.CrossRefGoogle Scholar
Bartolini, L., and Cottarelli, C.. “Treasury Bill Auctions: Issues and Uses.” In Macroeconomic Dimensions of Public Finance, Blejer, M. and Ter-Minassian, T., eds. London: Routledge (1997).Google Scholar
Bikhchandani, S.; Edsparr, P.; and Huang, C.. “The Treasury Bill Auction and the When-Issued Market: Some Evidence.” Working Paper, MIT (2000).Google Scholar
Bikhchandani, S., and Huang, C.. “Auctions with Resale Markets: A Model of Treasury Bill Auctions.” Review of Financial Studies, 2 (1989), 311–340.CrossRefGoogle Scholar
Bikhchandani, S., and Huang, C.. “The Economics of Treasury Securities Markets.” Journal of Economic Perspectives, 7 (1993), 117–134.CrossRefGoogle Scholar
Cammack, E. “Evidence on Bidding Strategies and the Information in Treasury Bill Auctions.” Journal of Political Economy, 99 (1991), 100–130.CrossRefGoogle Scholar
Chari, V. V., and Weber, R.. “How the U.S. Treasury Should Auction its Debt.” Quarterly Review, Federal Reserve Bank of Minneapolis (1992), 3–12.Google Scholar
Chatterjea, A., and Jarrow, R.. “Market Manipulation, Price Bubbles, and a Model of the United States Treasury Securities Auction Market.” Journal of Financial and Quantitative Analysis, 33 (1998), 255–289.CrossRefGoogle Scholar
Federal Register. “Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds.” 31 CFR Part 356 (2004).Google Scholar
Feldman, R., and Reinhart, V.. “Flexible Estimation of Demand Schedules and Revenue under Different Auction Formats.” Working Paper, International Monetary Fund (1995).CrossRefGoogle Scholar
Friedman, M.A Program for Monetary Stability. New York: Fordham University Press (1960).Google Scholar
Friedman, M. “How to Sell Government Securities.” Wall Street Journal, 08 28, 1991, p. A8.Google Scholar
Goswami, G.; Noe, T.; and Rebello, M.. “Collusion in Uniform-Price Auctions: Experimental Evidence and Implications for Treasury Auctions.” Review of Financial Studies, 9 (1996), 757–785.CrossRefGoogle Scholar
Hanke, B. “Treasury Buybacks: A Simultaneous Auction of Heterogeneous Objects.” Working Paper, London Business School (2002).Google Scholar
Hortacsu, A. “Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market.” Working Paper, University of Chicago (2002).Google Scholar
Hortacsu, A., and Sareen, S.. “Order Flow and the Formation of Dealer Bids: Information Flows and Strategic Behavior in the Government of Canada Securities Auctions.” Working Paper, University of Chicago (2005).Google Scholar
“Joint Report on the Government Securities Market.” Government Printing Office (1992).Google Scholar
Kremer, I., and Nyborg, K.. “Underpricing and Market Power in Uniform-Price Auctions.” Review of Financial Studies, 17 (2004), 849–877.CrossRefGoogle Scholar
Malvey, P., and Archibald, C.. “Uniform-Price Auctions: Update of the Treasury Experience.” U.S. Treasury (1998).Google Scholar
McAfee, R., and McMillan, J.. “Auctions and Bidding.” Journal of Economic Literature, 25 (1987), 699–738.Google Scholar
Milgrom, P. “Rational Expectations, Information Acquisition, and Competitive Bidding.” Econometrica, 49 (1981), 921–943.CrossRefGoogle Scholar
Milgrom, P. “Auctions and Bidding: A Primer.” Journal of Economic Perspectives, 3 (1989) 3–22.CrossRefGoogle Scholar
Milgrom, P., and Weber, R.. “A Theory of Auctions and Competitive Bidding.” Econometrica, 50 (1982), 1089–1122.CrossRefGoogle Scholar
Milgrom, P., and Weber, R.. “A Theory of Auctions and Competitive Bidding, II.” In The Economic Theory of Auctions, Klemperer, P., ed. Northampton, MA: Edward Elgar Publishing (2000).Google Scholar
Nyborg, K., and Sundaresan, S.. “Discriminatory Versus Uniform Treasury Auctions: Evidence from When-Issued Transactions.” Journal of Financial Economics, 42 (1996), 63–104.CrossRefGoogle Scholar
Parlour, C.; Prasnikar, V.; and Rajan, U.. “Compensating for the Winner's Curse: Experimental Evidence.” Working Paper, Carnegie Mellon University (2004).Google Scholar
Pesendorfer, W., and Swinkels, J.. “The Loser's Curse and Information Aggregation in Common Value Auctions.” Econometrica, 65 (1997), 1247–1282.CrossRefGoogle Scholar
Reinhart, V., and Belzer, G.. “Some Evidence on Bid Shading and Participation from the U.S. Treasury's Auction Experiment.” Working Paper, Board of Governors of the Federal Reserve System (1997).Google Scholar
Simon, D. P. “Markups, Quantity Risk, and Bidding Strategies at Treasury Coupon Auctions.” Journal of Financial Economics, 35 (1994a), 43–62.CrossRefGoogle Scholar
Simon, D. P. “The Treasury's Experiment with Single-Price Auctions in the Mid-1970s: Winner's or Taxpayer's Curse.” Review of Economics and Statistics, 76 (1994b), 754–760.CrossRefGoogle Scholar
Spindt, P., and Stolz, R.. “Are U.S. Treasury Bills Underpriced in the Primary Market?” Journal of Banking and Finance, 16 (1992), 891–908.CrossRefGoogle Scholar
Sundaresan, S.Fixed Income Markets and their Derivatives. Belmont, CA: South-Western College Publishing (1997).Google Scholar
Tenorio, R. “Revenue Equivalence and Bidding Behavior in a Multi-Unit Auction Market: An Empirical Analysis.” Review of Economics and Statistics, 75 (1993), 302–314.CrossRefGoogle Scholar
Umlauf, S. “An Empirical Study of the Mexican Treasury Bill Auction.” Journal of Financial Economics, 33 (1993), 313–340.CrossRefGoogle Scholar
Viswanathan, S., and Wang, J. J.. “Auctions with When-Issued Trading: A Model of the U.S. Treasury Auctions.” Working Paper, Duke University (2000).Google Scholar
Wang, J., and Zender, J.. “Auctioning Divisible Goods.” Economic Theory, 19 (2002), 673–705.CrossRefGoogle Scholar
Weber, R. J. “Multiple-Object Auctions.” In Auctions Bidding and Contracting: Uses and Theory, Engelbrecht-Wiggans, R., Shubik, M., and Stark, R. M., eds. New York, NY: NYU Press (1983).Google Scholar
Wilson, R. “Auctions of Shares.” Quarterly Journal of Economics, 93 (1979), 675–689.CrossRefGoogle Scholar
Wilson, R. “Strategic Analysis of Auctions.” In The Handbook of Game Theory, Aumann, R. and Hart, S., eds. Amsterdam: North-Holland/Elsevier (1990).Google Scholar