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Underpricing in Discriminatory and Uniform-Price Treasury Auctions

Published online by Cambridge University Press:  06 April 2009

David Goldreich
David Goldreich
Affiliation:
david.goldreich@rotman.utoronto.ca, University of Toronto, Rotman School of Management, University of Toronto, 105 St. George St., Toronto, Ontario, M5S 3E6, Canada
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Abstract

This paper compares the newer uniform-price U.S. Treasury auctions to 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. From the summary statistics released by the Treasury, I calibrate common value auction models for the two mechanisms and predict the level of underpricing in each auction. I find that the observed magnitude of underpricing in the auctions is consistent with the model's predictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 2 , June 2007 , pp. 443 - 466
Copyright
Copyright © School of Business Administration, University of Washington 2007

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