Topic: QE Auctions of Treasury Bonds
Speaker: Zhaogang Song, Economist, Monetary and Financial Market Analysis Section, Federal Reserve Board
Date: May 28th, 2014 (Wed.)
Time: 1:00pm-2:30pm
Location: Building 4, Room 101
Language: English
Abstract:
The Federal Reserve (Fed) uses a unique auction mechanism to purchase U.S. Treasury securities in implementing its quantitative easing (QE) policy. In this paper, we study the outcomes of QE auctions and participating dealers’ strategic behaviors from November 2010 to September 2011, during which the Fed purchased $780 billion Treasury securities. Our data include the transaction prices and quantities of each traded bond in each auction, as well as dealers’ identities. We find that: (1) In QE auctions the Fed tends to exclude bonds that are liquid and on special, but among included bonds, purchase volumes gravitate toward more liquid bonds; (2) The Fed pays around 0.7 cents per $100 par value above the secondary market ask price on auction dates; (3) The heterogeneity of Fed’s costs across bonds relates to their liquidity and specialness, suggesting that dealers strategically respond both to valuation and information uncertainty; (4) Dealers exhibit strong heterogeneity in their participation, trading volumes, and profits in QE auctions; (5) Auction bidding variables forecast bond returns only one day after the auction, suggesting that dealers’ information advantage decays quickly.
About the speaker:
Zhaogang Song is Economist in Monetary and Financial Market Analysis Section of Federal Reserve Board. Zhaogang Song received his Ph.D. in Economics from Cornell University in 2011. His fields of concentration are asset pricing, over-the-counter market structure and trading, financial econometrics.
