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Underpricing in Discriminatory and Uniform-Price Treasury Auctions

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  • Goldreich, David

Abstract

This Paper compares the new uniform-price US Treasury auctions with 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. The auctions are modeled in a multi-unit common-value setting with a winner?s curse problem. Underpricing results in equilibrium for both auction formats, although to a greater degree for the discriminatory auction. In the context of the model, the equilibrium level of underpricing in an individual auction can be predicted from the summary statistics released by the Treasury after each auction. Empirical results show that the magnitude of underpricing in the auctions, and the cross-sectional variation in underpricing, is consistent with the model.

Suggested Citation

  • Goldreich, David, 2003. "Underpricing in Discriminatory and Uniform-Price Treasury Auctions," CEPR Discussion Papers 4105, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4105
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    Cited by:

    1. Shida, Jakob, 2023. "Primary market demand for German government bonds," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. Ahmed Anwar, 2000. "Affiliation in Multi-Unit Discriminatory Auctions," Edinburgh School of Economics Discussion Paper Series 58, Edinburgh School of Economics, University of Edinburgh.
    3. Michael J. Fleming & Kenneth D. Garbade & Frank Keane, 2005. "Anomalous Bidding In Short‐Term Treasury Bill Auctions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(2), pages 165-176, June.
    4. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2005. "Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions," Journal of Finance, American Finance Association, vol. 60(4), pages 1865-1902, August.
    5. Rocholl, Jörg, 2005. "Discriminatory auctions with seller discretion: evidence from German treasury auctions," Discussion Paper Series 1: Economic Studies 2005,15, Deutsche Bundesbank.
    6. Michał Krawczyk, 2009. "Demand functions in Polish Treasury auctions," Bank i Kredyt, Narodowy Bank Polski, vol. 40(4), pages 31-49.

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    More about this item

    Keywords

    Treasury auctions; Bonds; Underpricing;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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