Treasury Auctions During A Crisis
Speaker(s) Rohit Lamba Publication Reserve Bank of India, CAFRAL, Mezzanine floor, Main Building, Shahid Bhagat singh road, Fort, Mumbai 400001
ABSTRACT

Treasuries all over the world sell sovereign bonds through an auction which is typically conducted by the central bank. When volatility in financial markets is high, auctions may fail to elicit the true price of the bond. To study the impact of increased uncertainty on bidder behavior in treasury auctions, we introduce (a) risk averse preferences and (b) common uncertainty in the valuation of the underlying security. Using detailed bid-level data on the Indian Treasury Bill market around the (in)famous episode called taper tantrum, we estimate bidders valuations in a model of multiunit discriminatory price auction. We find that average bid shading increases substantially during this period leading to a big loss to the exchequer. A large part of the increase in bid shade is explained by the rise in uncertainty as measured by activity in the secondary market. We also uncover systematic heterogeneity across bidders. While some bidders bid at low prices because their valuations are low, others bid less as a strategic response to the increased uncertainty. We evaluate two alternative selling mechanisms ?? uniform price auction and a fixed price tender. We find that switching the pricing rule to uniform does not reduce bidder surplus much. A fixed price mechanism, on the other hand, can help stabilize the market without affecting revenue much.


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