Underpricing in discriminatory and uniform-price Treasury auctions

Goldreich, CD (2004) Underpricing in discriminatory and uniform-price Treasury auctions. Working Paper. London Business School IFA Working Paper.

Abstract

This paper compares the new uniformprice 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 uniformprice 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 multiunit commonvalue 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 crosssectional variation in underpricing, is consistent with the model.