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An empirical test of auction efficiency: evidence from MBS auctions of the Federal Reserve

Author

Listed:
  • Pietro Bonadi
  • Ali Hotacsu
  • Zhaogang Song

Abstract

Purpose - We estimate the marginal cost curve of each dealer in each auction, based on structural models of the multiunit discriminatory-price auction. Design/methodology/approach - Auction theory has ambiguous implications regarding the relative performance of three formats of multiunit auctions: uniform-price, discriminatory-price and Vickrey auctions. We evaluate the performance of these three auction formats using bid-level data of the Federal Reserve’s purchase auctions of agency MBS from June 2014 through November 2014. Findings - Our results suggest that neither uniform-price nor Vickrey auctions outperform discriminatory-price auctions in terms of the total expenditure. However, Vickrey auctions outperform discriminatory-price auctions in terms of efficiency, with the efficiency gain around 0.74% of the surplus that dealers extract on average. Originality/value - To the best of our knowledge, this paper provides the first structural analysis of the auctions used by the Federal Reserve in implementing its monetary policies.

Suggested Citation

  • Pietro Bonadi & Ali Hotacsu & Zhaogang Song, 2024. "An empirical test of auction efficiency: evidence from MBS auctions of the Federal Reserve," China Finance Review International, Emerald Group Publishing Limited, vol. 14(4), pages 649-665, October.
    • Handle: RePEc:eme:cfripp:cfri-09-2024-0524
    DOI: 10.1108/CFRI-09-2024-0524
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    More about this item

    Keywords

    Agency MBS; Auction; Dealer; Federal Reserve; Structural models; E52; G2; D43;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G2 - Financial Economics - - Financial Institutions and Services
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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