Trading ahead of treasury auctions

Jean-David Sigaux

Journal of Banking & Finance, 2024, vol. 158, issue C

Abstract: I develop and test a model that explains the gradual price decline observed ahead of anticipated sales such as Treasury auctions. Risk-averse agents expect a noisy increase in the net supply of a risky asset. They face a trade-off between hedging the noise with long positions and speculating with short positions. As a result of hedging, the price is above the expected price. As the noise decreases, agents hedge less and speculate more, and the price falls. Consistent with these predictions, meetings between the Treasury and dealers and auction announcements explain a 2.4 basis point increase in the yield on Italian Treasuries.

Keywords: Anticipated supply shocks; Supply risk; Treasury auctions; Market making (search for similar items in EconPapers)
JEL-codes: E43 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002236

DOI: 10.1016/j.jbankfin.2023.107032

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