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

FEDS Working Paper No. 2015-082

http://dx.doi.org/10.17016/FEDS.2015.082

20 Pages Posted: 7 Oct 2015

See all articles by Pietro Bonaldi

Pietro Bonaldi

University of Chicago

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Zhaogang Song

Board of Governors of the Federal Reserve System

Date Written: August 21, 2015

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.

Keywords: Agency MBS, Auction, Nonparametric

JEL Classification: G12, G13

Suggested Citation

Bonaldi, Pietro and Hortacsu, Ali and Song, Zhaogang, An Empirical Test of Auction Efficiency: Evidence from MBS Auctions of the Federal Reserve (August 21, 2015). FEDS Working Paper No. 2015-082. Available at SSRN: https://ssrn.com/abstract=2663394 or http://dx.doi.org/10.2139/ssrn.2663394

Pietro Bonaldi

University of Chicago ( email )

Ali Hortacsu

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zhaogang Song (Contact Author)

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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