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Pre-auction short positions and impacts on primary dealers’ bidding behavior in US Treasury auctions

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  • Tchuindjo, Leonard

Abstract

We model the uniform-price US Treasury security auction as a static symmetric game with incomplete information in which each player is a primary dealer who submits a demand schedule given two independent sources of private information: her/his pre-auction short position of the auctioned security and her/his valuation of this security. Under the assumptions of constant marginal value and additive separability of the demand schedule, we obtain closed-form solutions for the dealer’s optimal demand schedule, and we find that her/his pre-auction short position impacts her/his bidding behavior in three ways. First, the primary dealer’s demand for the auctioned security increases with her/his pre-auction short position. Second, the primary dealer’s differential bid shading decreases with her/his pre-auction short position. Third, primary dealers with higher pre-auction short positions assign lower values to the auctioned security. Based on our findings, we propose policy recommendations that would allow the US Treasury to increase taxpayers’ revenue.

Suggested Citation

  • Tchuindjo, Leonard, 2015. "Pre-auction short positions and impacts on primary dealers’ bidding behavior in US Treasury auctions," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 193-201.
    • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:193-201
    DOI: 10.1016/j.jbankfin.2015.06.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Treasury auction; Primary dealers; Short position; Demand schedule; Bayesian-Nash equilibrium;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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