Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T07:25:00.378Z Has data issue: false hasContentIssue false
  • English
  • Français

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.
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Gale, D.. “Stock Price Manipulation.” Review of Financial Studies, 5 (1992), 503–529.CrossRefGoogle Scholar
Allen, F., and Gorton, G.. “Stock Price Manipulation, Market Microstructure and Asymmetric Information.” European Economic Review, 36 (1992), 624–630.CrossRefGoogle Scholar
Back, K., and Zender, J.. “Auctions of Divisible Goods: On the Rationale for the Treasury Experiment.” Review of Financial Studies, 6 (1993), 733–764.CrossRefGoogle Scholar
Baldwin, L. H.; Marshall, R. C.; and Richard, J.-F.. “Bidder Collusion at Forest Service Timber Sales.” Journal of Political Economy, 105 (No. 4, 1997), 657–699.CrossRefGoogle Scholar
Benabou, R., and Laroque, G.. “Using Privileged Information to Manipulate Markets: Insiders, Gurus and Credibility.” Quarterly Journal of Economics, CVII (1992), 921–958.CrossRefGoogle Scholar
Bhattacharya, U., and Spiegel, M.. “Insiders, Outsiders, and Market Breakdowns.” Review of Financial Studies, 4 (1991), 255–282.CrossRefGoogle Scholar
Bikhchandani, S., and Huang, C.. “Auctions with Resale Markets: An Exploratory Model of Treasury Bill Markets.” Review of Financial Studies, 2 (1989), 311–339.CrossRefGoogle Scholar
Bikhchandani, S., and Huang, C.. “The Economics of Treasury Securities Markets.” Journal of Economic Perspectives, 7 (3, 1993), 117–134.CrossRefGoogle Scholar
Cammack, E. B. “Evidence on Bidding Strategies and the Information in Treasury Bill Auctions.” Journal of Political Economy, 99 (1991), 100–130.CrossRefGoogle Scholar
Chatterjea, A.; Cherian, J. A.; and Jarrow, R. A.. “Market Manipulation and Corporate Finance: A New Perspective.” Financial Management, 22 (1993), 200–209.CrossRefGoogle Scholar
Cornell, B., and Shapiro, A. C.. “The Mispricing of U.S. Treasury Bonds: A Case Study.” Review of Financial Studies, 2 (1989), 297–310.CrossRefGoogle Scholar
Duffie, D. “Special Repo Rates.” Journal of Finance, 51 (1996), 493–526.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 69–90.CrossRefGoogle Scholar
Gerard, B., and Nanda, V.. “Trading and Manipulation around Seasoned Equity Offerings.” Journal of Finance, 48 (No. 1, 1993), 213–245.CrossRefGoogle Scholar
Goldreich, D. “Underpricing in Treasury Auctions.” Working Paper, London Business School (1997).Google Scholar
Jarrow, R. A. “Market Manipulation, Bubbles, Corners, and Short Squeezes” Journal of Financial and Quantitative Analysis, 27 (09 1992), 311–336.CrossRefGoogle Scholar
Jarrow, R. A. “Derivative Security Markets, Market Manipulation, and Option Pricing Theory.” Journal of Financial and Quantitative Analysis, 29 (06 1994), 241–261.CrossRefGoogle Scholar
Jegadeesh, N. “Treasury Auction Bids and the Salomon Squeeze.” Journal of Finance, 48 (1993), 1403–1419.CrossRefGoogle Scholar
John, K., and Narayanan, R.. “Market Manipulation and the Role of Insider Trading Regulations.” Journal of Business, 70 (No. 2, 1997), 217–247.CrossRefGoogle Scholar
Jordan, B. D., and Jordan, S. D.. “Salomon Brothers and the May (1991).Treasury Auction: Analysis of a Market Corner” Journal of Banking and Finance, 20 (01 1996), 25–40.CrossRefGoogle Scholar
Kumar, P., and Seppi, D. J.. “Futures Manipulation with ‘Cash Settlement.’” Journal of Finance, 47 (1992), 1485–1502.Google Scholar
Kyle, A. S. “Continuous Auction and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
McAfee, R. P., and McMillan, J.. “Auctions and Bidding.” Journal of Economic Literature, 30 (1987), 699–738.Google Scholar
Milgrom, P. “Auctions and Bidding: A Primer.” Journal of Economic Perspectives, 3 (1989), 3–22.CrossRefGoogle Scholar
Milgrom, P., and Weber, R.. “A Theory of Auctions and Competitive Bidding.” Econometrica, 50 (1982), 1089–1122.CrossRefGoogle Scholar
Nyborg, K. G., and Sundaresan, S.. “Discriminatory versus Uniform Treasury Auctions: Evidence from When-Issued Transactions” Journal of Financial Economics, 42 (09 1996), 63–104.CrossRefGoogle Scholar
O'Hara, M.Market Microstructure Theory. Cambridge, MA: Blackwell Publishers (1995).Google Scholar
Salomon Inc. “Statement of Salomon Inc. Submitted in Conjunction with the Testimony of Warren E. Buffett, Chairman and Chief Executive Officer of Salomon Inc., before the Securities Subcommittee, Committee on Banking, Housing and Urban Affairs, United States Senate” (1991).Google Scholar
Sundaresan, S. “An Empirical Analysis of U.S. Treasury Auctions: Implications for Auction and Term Structure Theories” Journal of Fixed Income, 4 (09 1994), 35–50.CrossRefGoogle Scholar
Tsao, C. S., and Vignola, A. J.. “Price Discrimination and the Demand for Treasury's Long Term Securities.” Working Paper (1976).Google Scholar
Umlauf, S. R. “An Empirical Study of the Mexican Treasury Bill Auction.” Journal of Financial Economics, 33 (1993), 313–340.CrossRefGoogle Scholar
United States Government: Department of the Treasury, Securities and Exchange Commission, Board of Governors of the Federal Reserve System. “Joint Repon on the Government Securities Market”. U.S. Government Printing Office, Washington, D.C. (01 1992).Google Scholar
Vila, J. L. “Simple Games of Market Manipulation.” Economic Letters, 29 (1989), 21–26.CrossRefGoogle Scholar
Viswanathan, S., and Wang, J. J. D.. “Auctions with When-Issued Trading: A Model of the U.S. Treasury Markets.” Working Paper, Duke Univ. (1996).Google Scholar
Wang, J. J. D., and Zender, J. F.. “Auctioning Divisible Goods.” Working Paper, Univ. of Utah (1996).Google Scholar