Working Paper No. 42
By Francis Breedon and Joe Ganley
Many studies have shown that government debt auctions underprice debt compared with the secondary market. This paper corroborates this for certain forms of gilt auction by comparing the price received at auction with an almost identical parent stock in the secondary market. Although the sample is small, the parent/tranche price comparison gives a cleaner measure than used in other studies. The paper also compares non-fungible auctions (where the tranche differs slightly from the parent at auction and merges subsequently) with fully-fungible ones (where they are identical throughout). Significant underpricing only occurs in non-fungible auctions.