A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information

Harold Cole, Daniel Neuhann () and Guillermo Ordonez
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Daniel Neuhann: Department of Economics, Columbia University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Sovereign bonds are highly divisible, usually of uncertain quality, and auctioned in large lots to a large number of investors. This leads us to assume that no individual bidder can affect the bond price, and to develop a tractable Walrasian theory of Treasury auctions in which investors are asymmetrically informed about the quality of the bond. We characterize the price of the bond for different degrees of asymmetric information, both under discriminatory-price (DP) and uniform-price (UP) protocols. We endogenize information acquisition and show that DP protocols are likely to induce multiple equilibria, one of which features asymmetric information, while UP protocols are unlikely to sustain equilibria with asymmetric information. This result has welfare implications: asymmetric information negatively affects the level, dispersion and volatility of sovereign bond prices, particularly in DP protocols.

Pages: 54 pages
Date: 2017-05-01, Revised 2017-05-01
New Economics Papers: this item is included in nep-des and nep-dge
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Related works:
Working Paper: A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information (2018)
Working Paper: A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information (2017)
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