Information in T-bill Auction Bid Distributions

In this paper UK data is used to compare two potential sources of information regarding market uncertainty about future short interest rates. One is the so-called risk-neutral density function (RND) derived from interest rate option prices, the other is the distribution of bids submitted to an auction of short-term Treasury bills. More specifically, time series of RND standard deviations and auction bid standard deviations are compared. The results suggest that in some periods the auction bid standard deviations co-moved with those of the RNDs. Thus, in principle, auction bid standard deviations may be useful to get a picture of market uncertainty about future short rates even in the absence of well-developed interest rate options markets. In the Supplement, encouraged by the above results, the author uses Hungarian T-bill auction data to check whether auction bid dispersion measures in Hungary make any sense as indicators of market uncertainty about future interest rates. Lacking any RND data for this country, this can only be done in indirect ways. These include looking at the correlations of auction dispersion measures of different T-bill maturities, comparing the time series of these measures and bid-ask spreads (another possible indicator of uncertainty) and conducting an intuitive consistency check for a certain time period.