Underpricing in Discriminatory and Uniform-Price Treasury Auctions
AbstractThis 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4105.
Date of creation: Nov 2003
Date of revision:
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Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-29 (All new papers)
- NEP-FMK-2004-02-29 (Financial Markets)
- NEP-MIC-2004-02-29 (Microeconomics)
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