A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

67 Pages Posted: 13 Nov 2017 Last revised: 2 Aug 2018

See all articles by Harold L. Cole

Harold L. Cole

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

Daniel Neuhann

University of Texas at Austin, McCombs School of Business

Guillermo Ordoñez

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

Multiple version iconThere are 4 versions of this paper

Date Written: November 9, 2017

Abstract

How does investors' information about a country's fundamentals, and the fact that this information may be asymmetrically held, affect a country's financing cost? Motivated by this question, and by the observation that sovereign bonds are usually auctioned in large lots to a large number of potential investors, we develop a novel model of auctions with asymmetric information that relies on price-taking and rational expectations. We first characterize sovereign bond prices for different degrees of asymmetric information under two commonly-used protocols: discriminatory-price auctions and uniform-price auctions. We show that there is trade-off between these protocols if information is sufficiently asymmetric: expected bond yields are higher when pricing is discriminatory, but yield volatility is higher when pricing is uniform. We then study endogenous information acquisition and find that (i) discriminatory auctions may display multiple welfare-ranked informational equilibria, and (ii) investors are less likely to acquire information in uniform auctions.

Keywords: Sovereign Debt, Auctions, Heterogeneous Information, Equilibrium

JEL Classification: F34, E4, E5, G12, D44, D4, D53

Suggested Citation

Cole, Harold L. and Neuhann, Daniel and Ordoñez, Guillermo, A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information (November 9, 2017). Available at SSRN: https://ssrn.com/abstract=3068246 or http://dx.doi.org/10.2139/ssrn.3068246

Harold L. Cole (Contact Author)

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Daniel Neuhann

University of Texas at Austin, McCombs School of Business ( email )

Austin, TX 78701
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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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