Underpricing in Discriminatory and Uniform-Price Treasury Auctions

52 Pages Posted: 12 Dec 2003

See all articles by David Goldreich

David Goldreich

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

This Paper compares the new uniform-price US Treasury auctions with the traditional discriminatory mechanism and examines the extent to which the auction mechanisms are responsible for underpricing. Empirically, I find that even for the newer uniform-price auctions, the average price received by the Treasury is less than the price of the same securities in the concurrent secondary market, although this underpricing is reduced by half relative to the older mechanism. The auctions are modeled in a multi-unit common-value setting with a winner's curse problem. Underpricing results in equilibrium for both auction formats, although to a greater degree for the discriminatory auction. In the context of the model, the equilibrium level of underpricing in an individual auction can be predicted from the summary statistics released by the Treasury after each auction. Empirical results show that the magnitude of underpricing in the auctions, and the cross-sectional variation in underpricing, is consistent with the model.

JEL Classification: D44, G28

Suggested Citation

Goldreich, David, Underpricing in Discriminatory and Uniform-Price Treasury Auctions (November 2003). CEPR Discussion Paper No. 4105. Available at SSRN: https://ssrn.com/abstract=479060

David Goldreich (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

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