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Trading ahead of treasury auctions

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  • Sigaux, Jean-David

Abstract

I develop and test a model that explains the gradual price decline observed ahead of anticipated sales such as Treasury auctions. Risk-averse agents expect a noisy increase in the net supply of a risky asset. They face a trade-off between hedging the noise with long positions and speculating with short positions. As a result of hedging, the price is above the expected price. As the noise decreases, agents hedge less and speculate more, and the price falls. Consistent with these predictions, meetings between the Treasury and dealers and auction announcements explain a 2.4 basis point increase in the yield on Italian Treasuries.

Suggested Citation

  • Sigaux, Jean-David, 2024. "Trading ahead of treasury auctions," Journal of Banking & Finance, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002236
    DOI: 10.1016/j.jbankfin.2023.107032
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    References listed on IDEAS

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    More about this item

    Keywords

    Anticipated supply shocks; Supply risk; Treasury auctions; Market making;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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