Are U.S. Treasury Auctions Twice Underpriced?

28 Pages Posted: 14 Mar 2018 Last revised: 2 Nov 2018

See all articles by Patrick Herb

Patrick Herb

Brandeis University, International Business School

Date Written: March 6, 2018


I empirically show that underpricing in U.S. Treasury auctions is explained by a risk premium for exogenously determined holding period risk. Investors who place winning auction bids must wait day(s) to settle the transaction, in which the settlement period is exogenously determined by the Treasury. Post-auction prices rise because auction prices are discounted for holding period risk. I model the returns from underpricing with a GARCH-M process and show that the bulk of underpricing is compensation for risk. I also show that auction demand is determined by the expected risk-adjusted returns that result from underpricing. These results suggest that U.S. Treasury pre- and post-auction markets are much more efficient than recent literature suggests.

Keywords: Underpricing, Volatility, Auction Demand, Bid-to-cover, Effective-lower-bound, Time-varying risk premia

JEL Classification: G12

Suggested Citation

Herb, Patrick, Are U.S. Treasury Auctions Twice Underpriced? (March 6, 2018). Available at SSRN: or

Patrick Herb (Contact Author)

Brandeis University, International Business School ( email )

Mailstop 32
Waltham, MA 02454
United States


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