An empirical test of auction methods in the primary market of sovereign debt

ABSTRACT

There has been a long debate as to which of the most extended systems, the uniform system or the discriminatory price system, is the most appropriate for central banks and debt management offices issuing sovereign bonds. The purpose of this paper is to shed light on this question. The main variables to explore the auction mechanisms are the price difference between the primary and secondary markets (price spread) and the coverage ratio. Subsequently, to determine patterns for clarifying which auction system is optimal, we propose a new model based on the price spread and a valuation model for financial options that covers both negative and positive spreads. We conclude that the auction method and the number of primary dealers are relevant parameters in the auction outcome. Finally, the results of the new model are the cornerstone for identifying detailed patterns followed by top-performing countries.

KEYWORDS:

• Auction method
• sovereign debt
• options
• discriminatory
• uniform-price
• Spanish auctions

JEL CLASSIFICATION:

• H63
• D44
• N20

Table A1. Sources for auction terms.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak, Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, India, Indonesia People’s Republic of China and South Africa.

2. According to the International Monetary Fund, gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardised guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110). The definition is available in https://www.imf.org/external/datamapper/..

3. VWe apply the classification adopted by the International Monetary Fund for advanced economies and emerging market and developing economies. The classification is applied to economic indicators available in https://www.imf.org/external/datamapper/data sets.

4. García and Gimeno (2014) distinguish two groups in a working paper published by the Bank of Spain: ‘core’ countries (Austria, Belgium, Finland, France, Germany and Netherlands) and (ii) ‘stressed’ countries (Greece, Ireland, Italy, Portugal and Spain), whose sovereign debt was more seriously affected by the market turbulences and that eventually was subject to the Eurosystem Securities Market Programme (SMP).