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Bidding and Information: Evidence from Gilt-Edged Auctions

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  • Francis Breedon
  • Joe Ganley

Abstract

This paper looks in detail at pricing in Gilt Auctions. It compares the prices received at all auctions between May 1987 and February 1995 with both the When-Issued price (the pre- auction market for delivery of the auction stock) and the price of a comparable parent stock (when one existed). The paper finds a marked difference in performance between non-fungible stocks (when a parent exists but the tranche cannot be traded identically with the parent until a few weeks after the auction due to part payments and different first coupons) and fully-fungible stocks (when the parent and tranche trade identically from auction day). The average auction price received for non-fungible stock was significantly below both the When-issued price (about 13p per o100) and the adjusted parent price (about 24p per o100). In the case of fully fungible auctions there was no discernable price difference between auction stock, When-issued, or adjusted parent stock price. Auction prices below comparable secondary market ones is a common result for Government debt auctions (similar results have been found for the US, Germany and Mexico). The explanation usually given is that uncertainty about the correct price leads bidders to shade down their bids. The paper examines this explanation and finds that although it can help explain the results for non- fungible auctions (measures of uncertainty seem to be correlated with the degree of price difference) it does not explain the markedly different results observed for fully-fungible auctions since the dispersion of bids for these auctions is no less than for non-fungible ones suggesting that some uncertainty still exists. This is a slightly revised version of a paper that was published in July 1995 as part of the Debt Management Review.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1996/wp42.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 42.

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Date of creation: Jan 1996
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Handle: RePEc:boe:boeewp:42

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  1. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers 1153, C.E.P.R. Discussion Papers.
  2. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
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Cited by:
  1. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers 357966000000000025, UCLA Department of Economics.
  2. Michael A.S. Joyce & Matthew Tong, 2012. "QE and the Gilt Market: a Disaggregated Analysis," Economic Journal, Royal Economic Society, vol. 122(564), pages F348-F384, November.
  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. Breuer, Wolfgang, 1999. "The relevance of primary dealers for public bond issues," CFS Working Paper Series 1999/11, Center for Financial Studies (CFS).

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