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An Empirical Test of Auction Efficiency: Evidence from MBS Auctions of the Federal Reserve

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  • Pietro Bonaldi
  • Ali Hortacsu
  • Zhaogang Song

Abstract

Auction theory has ambiguous implications regarding the relative efficiency of three formats of multiunit auctions: uniform-price, discriminatory-price, and Vickrey auctions. We empirically evaluate the performance of these three auction formats using the bid-level data of the Federal Reserve's purchase auctions of agency mortgage-backed securities (MBS) from June 1, 2014 through November 17, 2014. We estimate marginal cost curves for all dealers, at each auction, based on structural models of the multiunit discriminatory-price auction. Our preliminary results suggest that neither uniform-price nor Vickrey auctions outperform discriminatory-price auctions in terms of the total expenditure. However, they do outperform in terms of efficiency, with efficiency gains around 0.74% of the surplus that dealers extract. We caution that our empirical estimation and analysis involve technical assumptions made about the specific auction mechanism the Federal Reserve uses and how auction participants perceive the auction mechanism, both of which may be distinct from practice and may alter the conclusions substantively.

Suggested Citation

  • Pietro Bonaldi & Ali Hortacsu & Zhaogang Song, 2015. "An Empirical Test of Auction Efficiency: Evidence from MBS Auctions of the Federal Reserve," Finance and Economics Discussion Series 2015-82, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-82
    DOI: 10.17016/FEDS.2015.082
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    References listed on IDEAS

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    1. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
    2. James Vickery & Joshua Wright, 2013. "TBA trading and liquidity in the agency MBS market," Economic Policy Review, Federal Reserve Bank of New York, vol. 19(May), pages 1-18.
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    4. Jakub Kastl, 2011. "Discrete Bids and Empirical Inference in Divisible Good Auctions," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 974-1014.
    5. Ali Hortaçsu & Jakub Kastl, 2012. "Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions," Econometrica, Econometric Society, vol. 80(6), pages 2511-2542, November.
    6. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
    7. Ali Hortaçsu & David McAdams, 2010. "Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 833-865.
    8. Kastl, Jakub, 2012. "On the properties of equilibria in private value divisible good auctions with constrained bidding," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 339-352.
    9. 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.
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    Cited by:

    1. Klenio Barbosa & Dakshina De Silva & Liyu Yang & Hisayuki Yoshimoto, 2019. "Auction Mechanisms and Treasury Revenue," Working Papers 267027285, Lancaster University Management School, Economics Department.
    2. Jiakai Chen & Haoyang Liu & Asani Sarkar & Zhaogang Song, 2020. "Dealers and the Dealer of Last Resort: Evidence from MBS Markets in the COVID-19 Crisis," Staff Reports 933, Federal Reserve Bank of New York.

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