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Treasury auctions: what do the recent models and results tell us?

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  • Saikat Nandi
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    Abstract

    Auctions, as selling mechanisms, have existed for well over two thousand years. Today, one of the most important auction markets in the world is that of U.S. Treasury securities; approximately $2 trillion worth of Treasury securities was auctioned in 1995. ; A long-standing debate has been about selecting an appropriate auction format for various Treasury securities, a format that would be least subject to possible manipulation by individual traders or a cartel and also result in the highest possible revenues for the Treasury. The Treasury is currently experimenting with what is called a uniform-price format for auctioning two- and five-year Treasury notes. A similar mechanism might be put into broader use. ; This article explains Treasury auctions in light of recent theoretical research and related empirical evidence. Empirically there seems to be no discernible difference between discriminatory and uniform-price auctions in terms of revenue to the Treasury. The author concludes that the proposal to switch to electronic ascending-price open-outcry auctions with an implied uniform price may be worthy of more consideration.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

    Volume (Year): (1997)
    Issue (Month): Q 4 ()
    Pages: 4-15

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    Handle: RePEc:fip:fedaer:y:1997:i:q4:p:4-15:n:v.82no.4

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    Keywords: Auctions ; Financial markets ; Treasury notes;

    References

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    1. Michael B. Gordy, 1997. "Hedging Winner's Curse with Multiple Bids: Evidence from the Portuguese Treasury Bill Auction," Microeconomics, EconWPA 9702002, EconWPA.
    2. Robert Alan Feldman & Vincent Reinhart, 1995. "Flexible Estimation of Demand Schedules and Revenue Under Different Auction Formats," IMF Working Papers 95/116, International Monetary Fund.
    3. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
    4. Gautam Goswami & Thomas Noe & Michael Rebello, 1995. "Collusion in uniform-price auctions: experimental evidence and implications for Treasury auctions," Working Paper, Federal Reserve Bank of Atlanta 95-5, Federal Reserve Bank of Atlanta.
    5. Hugh Cohen & Douglas McBeth, 1994. "The effect of tick size on Treasury auctions," Working Paper, Federal Reserve Bank of Atlanta 94-9, Federal Reserve Bank of Atlanta.
    6. Umlauf, Steven R., 1993. "An empirical study of the Mexican Treasury bill auction," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(3), pages 313-340, June.
    7. V.V. Chari & Robert J. Weber, 1992. "How the U.S. Treasury should auction its debt," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-12.
    8. Chatterjea, Arkadev & Jarrow, Robert A., 1998. "Market Manipulation, Price Bubbles, and a Model of the U.S. Treasury Securities Auction Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 33(02), pages 255-289, June.
    9. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1089-1122, September.
    10. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 675-89, November.
    11. Nyborg, Kjell G. & Sundaresan, Suresh, 1996. "Discriminatory versus uniform Treasury auctions: Evidence from when-issued transactions," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(1), pages 63-104, September.
    12. Simon, David P., 1994. "Markups, quantity risk, and bidding strategies at treasury coupon auctions," Journal of Financial Economics, Elsevier, Elsevier, vol. 35(1), pages 43-62, February.
    13. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-64.
    14. Tenorio, Rafael, 1993. "Revenue Equivalence and Bidding Behavior in a Multi-unit Auction Market: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 302-14, May.
    15. Clifford W. Smith, 1992. "Economics And Ethics: The Case Of Salomon Brothers," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 5(2), pages 23-28.
    16. Kjell G. Nyborg & Kristian Rydqvist & Suresh M. Sundaresan, 2002. "Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(2), pages 394-424, April.
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    Cited by:
    1. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "Estimación de la tasa natural de interés para la economía peruana," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 261-298, julio-sep.
    2. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers, UCLA Department of Economics 357966000000000025, UCLA Department of Economics.
    3. Sara Castellanos, 2001. "A New Empirical Study of the Mexican Treasury Securities Primary Auctions: Is there more underpricing?," Levine's Working Paper Archive 625018000000000206, David K. Levine.
    4. Walter Orellana & Bernardo Fernández & Vladimir Fernández, 2006. "Subasta electrónica interactiva y subasta a sobre cerrado: un análisis comparativo de los resultados en Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 299-345, julio-sep.
    5. Rodolfo Guerrero & José Luis Negrín, 2006. "Eficiencia del sistema bancario mexicano 1997-2004: una estimación dinámica," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 235-259, julio-sep.
    6. Rocholl, Jörg, 2005. "Discriminatory auctions with seller discretion: evidence from German treasury auctions," Discussion Paper Series 1: Economic Studies 2005,15, Deutsche Bundesbank, Research Centre.

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