Auction Mechanisms and Treasury Revenue: Evidence from the Chinese Experiment

Abstract

This paper exploits a large-size auction experiment conducted by two Chinese Government Treasury security issuers-the Chinese Development Bank and the Export-Import Bank-to investigate whether Treasury securities should be sold through uniform or discriminatory auction mechanisms. Based on the outcomes of more than 300 Treasury securities issued through an alternating auction-rule market experiment, we find that auction outcome yield rates of the two auction formats are not statistically different, suggesting revenue equivalence. This equivalence is robust across different revenue measurements and participation behavior.

Bond Losses and Systemic Risk

“…Next, we also re-estimate the market gap (Equation 1) controlling for volume. We have only 34 Barbosa et al (2018) show that, during the experiment period, the value of the market yield the day before the primary market, secondary market volatility, and the value of maturing bonds by the institution for a given month are not statistically different between the uniform and discriminatory format. Barbosa et al (2018) also find that, between the two auction formats, bidders' entry behavior does not reveal any statistical difference.…”

“…We have only 34 Barbosa et al (2018) show that, during the experiment period, the value of the market yield the day before the primary market, secondary market volatility, and the value of maturing bonds by the institution for a given month are not statistically different between the uniform and discriminatory format. Barbosa et al (2018) also find that, between the two auction formats, bidders' entry behavior does not reveal any statistical difference. 35 We do not estimate this using a Heckman model, as more than 94% (328 out of 348) of bonds sold in primary market auctions during this experiment period had experienced secondary market sales on their debut days.…”

“…To investigate this hypothesis further, we examine the movements of the Chinese FTSE Russel financial indexes on debut-days when Chinese primary market dealers suffer significant secondary market bond losses. 4 In this exercise, we first identify secondary market debut-days with significant bond losses using all secondary market debut-dates in which we observe only all positive or all negative margins. We then create a balanced panel for these secondary market transactions with FTSE banking and security sector indexes two days prior to and two days after the secondary market debut date.…”

“…Preceding studies of Treasury auctions and related bond markets have concentrated on rate in the interbank market. 4 FTSE Chinese financial indices include 600 large and mid-cap A-share stocks listed on the Shanghai and Shenzhen stock exchanges. As these indices provide broad coverage of Chinese financial institutions and stock markets, they contain information about the financial health of banks and insurance companies in China overall.…”