Comparison of two parameterizations of the winner's curse model in a sample of Swedish Treasury auctions
Purpose - The purpose of this paper is to examine the underpricing effect in Treasury auctions. Design/methodology/approach - The paper compares two winner's curse models using a dataset on multi-unit auctions. The dataset is from Swedish Treasury auctions, which is under a discriminatory auction mechanism. One model is a single-unit equilibrium model assuming that each bidder bids for 100 percent of the auctioned securities, which is described by Wilson and solved by Levin and Smith. The other model is a multi-unit model calibrated by Goldreich using the US Treasury auctions data and assumes that each bidder bids for one unit of the auctioned securities. Findings - The empirical results show that, although both models work well in predicting the bid-shading, the multi-unit model fits the Swedish Treasury auctions data better than the single-unit model. Research limitations/implications - The evidence implies that bidders rationally adjust their bids due to the winner's curse/champion's plague. Originality/value - This study provides close quantitative predictions of the amount of bid-shading using both single-unit model of Wilson and multi-unit model of Goldreich, and indicates that winner's curse or champion's plague worries bidders in countries other than the USA.
Volume (Year): 20 (2012)
Issue (Month): 2 (May)
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- Milgrom, Paul R & Weber, Robert J, 1982.
"A Theory of Auctions and Competitive Bidding,"
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- Goldreich, David, 2007. "Underpricing in Discriminatory and Uniform-Price Treasury Auctions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(02), pages 443-466, June.
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- Levin, Dan & Smith, James L, 1991. "Some Evidence on the Winner's Curse: Comment," American Economic Review, American Economic Association, vol. 81(1), pages 370-375, March.
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- 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, vol. 6(4), pages 733-764.
- Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518. Full references (including those not matched with items on IDEAS)
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