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Market Manipulation, Price Bubbles, and a Model of the U.S. Treasury Securities Auction Market

Published online by Cambridge University Press:  06 April 2009

Arkadev Chatterjea  and
Robert A. Jarrow
Arkadev Chatterjea
Affiliation:
Kelley School of Business, Indiana University, Bloomington, IN 47405
Robert A. Jarrow
Affiliation:
Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853 and the Kamakura Corporation, Chigasaki, Japan.
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Abstract

This paper models the U.S. Treasury securities auction market and demonstrates that market manipulation can occur in a rational equilibrium. It is a dynamic model with traders participating in a “when-issued” market, a Treasury auction, and a resale market. Manipulations occur when dealers in the when-issued market use their knowledge of the net order flow in order to corner the auction and squeeze the shorts (from the when-issued market). This manipulation equilibrium generates bubbles in Treasury security prices and specials in repo rates. We also compare discriminatory and uniform price auction rules with respect to manipulation. Our analysis shows that manipulations can occur in long-run equilibrium under discriminatory price auctions, but not under uniform price auctions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 2 , June 1998 , pp. 255 - 289
Copyright
Copyright © School of Business Administration, University of Washington 1998

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