An empirical test of auction efficiency: evidence from MBS auctions of the Federal Reserve

Pietro Bonadi, Ali Hotacsu and Zhaogang Song

China Finance Review International, 2024, vol. 14, issue 4, 649-665

Abstract: Purpose - We estimate the marginal cost curve of each dealer in each auction, based on structural models of the multiunit discriminatory-price auction. Design/methodology/approach - Auction theory has ambiguous implications regarding the relative performance of three formats of multiunit auctions: uniform-price, discriminatory-price and Vickrey auctions. We evaluate the performance of these three auction formats using bid-level data of the Federal Reserve’s purchase auctions of agency MBS from June 2014 through November 2014. Findings - Our results suggest that neither uniform-price nor Vickrey auctions outperform discriminatory-price auctions in terms of the total expenditure. However, Vickrey auctions outperform discriminatory-price auctions in terms of efficiency, with the efficiency gain around 0.74% of the surplus that dealers extract on average. Originality/value - To the best of our knowledge, this paper provides the first structural analysis of the auctions used by the Federal Reserve in implementing its monetary policies.

Keywords: Agency MBS; Auction; Dealer; Federal Reserve; Structural models; E52; G2; D43 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-09-2024-0524

DOI: 10.1108/CFRI-09-2024-0524

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