Sovereign Debt Auctions: Theory and Empirics

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

Abstract Governments finance part of their budgetary needs by selling bonds through sovereign debt auctions. The price at which they can sell these bonds play a critical role in determining their cost of financing deficits, their implementation of monetary policy, and even the extent to which they can successfully navigate macroeconomic shocks. These auctions commonly come in two forms - uniform-price auctions (UP), in which all bidders pay the same price for the bonds and discriminatory-price auctions (DP) in which all bidders pay what they bid. This project will explore the determinants of bond prices and how sensitive those prices are to available information about governments and about macroeconomic variables. The project will further look at how these different auction protocols affect the revenue of governments as well as the likelihood of debt crises and the exposure of bond prices to changing economic conditions. This research consists of two projects. The first project develops a tractable theoretical framework to understand investors' bidding behavior and information choices in response to different auction protocols. The project uncovers a theoretically relevant trade-off between these two protocols when information is asymmetric. On the one hand, UP auctions allow governments to obtain an average higher price for its bonds. On the other hand, this protocol increases the sensitivity of bond prices to demand shocks. The second project consists on exploring the testable implications of the model utilizing detailed auction data in a setting where auction protocols have changed intermittently for the same country and sovereign interest rates went through periods of high turbulence and periods of prolonged stability. The project will also digitize this data. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.