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A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

Author

Listed:
  • Guillermo Ordonez

    (University of Pennsylvania)

  • Daniel Neuhann

    (University of Texas at Austin)

  • Harold Cole

    (University of Pennsylvania)

Abstract

Sovereign bonds are highly divisible (since they are sold in large lots), usually of uncertain quality and sold to a large number of investors. As no bidder can individually affect the bond price, we develop a tractable Walrasian theory of Treasury auctions in which investors are asymmetrically informed about the quality of the bond. We characterize the price of the bond for different degrees of asymmetric information, both under price-discriminating (PD) and uniform-price (UP) protocols. We endogenize information acquisition and show that PD protocols are likely to induce multiple equilibria, one displaying asymmetric information, while UP protocols are unlikely to sustain equilibria with asymmetric information. This result has welfare implications as asymmetric information negatively affects the level and volatility of sovereign bond prices.

Suggested Citation

  • Guillermo Ordonez & Daniel Neuhann & Harold Cole, 2017. "A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information," 2017 Meeting Papers 787, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:787
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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