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Auction Pricing Performances in EMU Primary Markets

The following thesis works out an overall description of EMU members’ institutional setups for sovereign bond issuances and looks for a possible explanation of strategic behavior undertaken by those agents, namely Primary Dealers, called to be intermediaries between issuers and investors. More in detail, I investigate the systematic mismatch occurring when comparing prices of securities in auction for debt issuances and secondary market prices. Since it has already been shown that securities are almost always overpriced when issued in the primary market, I offer a conceivable explanation for why Primary Dealers may be willing to pay a higher price when participating in an auction, taking into account that the secondary market, if large and liquid enough as it is assumed to be, provides a natural benchmark for the correct pricing of sovereign bonds since, as the literature suggests, it embodies all the information needed for a correct asset evaluation.
The research is focused on the determinants of overpricing which may be interpreted as an attempt by larger Primary Dealers to reduce the level of long-run competition in the primary market driving smaller Primary Dealers out of the primary market, finally leading to less efficient issuance systems.

Mostra/Nascondi contenuto.
5 Introduction The efficiency and effectiveness of financing services have always been considered as strategic by sovereign issuers. The desire, as well as the need, of widening the sovereign bonds’ market, on the one hand, and the attempt to increase issuance revenues on the other, have always raised the problem of finding the best way for selling securities. The adoption of auctions as issuance techniques and the establishment of what are nowadays called Primary Dealership Systems represent the current answer to that concern. The debate focused on the best-performing auction format has never expired. Evidence of such an endless discussion was, for instance, the decision taken by U.S. Treasury in the early nineteen nineties to switch from discriminatory to uniform price auctions to sell some of its securities (e.g. two-year and five-year notes)1. The choice of the auction format aimed at maximizing revenues from issuance must ensure participants the opportunity to price securities at best. As the literature suggests, this is more likely to happen when bidders do not bear the risk to overestimate the asset’s value thus incurring in losses when buying for selling in resale markets2. 1 See “Joint Report on the Government Securities Market”, Department of U.S. Treasury, 1992. 2 Such a phenomenon taking the name of Winner’s Curse typically occurs in common value auction with incomplete information. In short, the winner's curse says that the auction winner tends to overpay if not aware of the real value of the auctioned asset. However, despite its name, it does not necessarily have ill effects. The definition of

Laurea liv.II (specialistica)

Facoltà: Economia

Autore: Leonardo Guardiani Contatta »

Composta da 61 pagine.

 

Questa tesi ha raggiunto 87 click dal 23/02/2010.

Disponibile in PDF, la consultazione è esclusivamente in formato digitale.