Salomon Brothers and the May 1991 Treasury Auction: Analysis of a Market Corner

Posted: 10 May 2000

See all articles by Bradford D. Jordan

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Susan D. Jordan

University of Kentucky - Finance

Abstract

In May 1991, the Treasury sold $12.29 billion in two-year notes. Through improper bidding, Salomon Brothers gained control of at least 86 percent of the issue. This study investigates the impact of Salomon's attempted corner by examining the postauction price behavior of the two-year note. Based on a no-arbitrage relation, the results show that the two-year note was substantially overpriced for approximately six weeks following the auction. The typical mispricing during this period is estimated at 0.16 to 0.25 percent of par. In dollar terms, the aggregate misvaluation averaged $20 - $30 million, and, by controlling the supply of the issue, Salomon stood to gain substantially from the squeeze.

JEL Classification: G12, G18, G24

Suggested Citation

Jordan, Bradford D. and Jordan, Susan D., Salomon Brothers and the May 1991 Treasury Auction: Analysis of a Market Corner. Available at SSRN: https://ssrn.com/abstract=5782

Bradford D. Jordan (Contact Author)

University of Florida ( email )

Gainesville, FL 32611
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Susan D. Jordan

University of Kentucky - Finance ( email )

Gatton College of Business & Economics
University of Kentucky
Lexington, KY 40506-0034
United States
859-257-1626 (Phone)

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