Working Papers

-previously, “Why They Buy: Primary Market Demand for U.S. Treasury Securities”

Abstract: Why are treasury auctions underpriced? This question has been the subject of much debate over nearly half a century. Much attention is given to how frictions increase underpricing. The two main streams of research consider either the role of financial frictions that result from the size of auctions or the role of auction design in the context of game theory. Both document that underpricing is increasing in volatility, but interpret volatility as amplifying the effect of frictions. In this paper, I separate out the effects of frictions and volatility on underpricing in U.S. Treasury auctions. I find that while both affect underpricing, the effect of volatility tends to be larger. This finding suggests that underpricing due to volatility is in fact compensation for risk, and that underpricing can persist in frictionless auction markets. This is a dramatic departure from convention because underpricing is viewed almost exclusively as an aberration from market efficiency.

“Empirical Evidence for Carry Trade Liquidity Spirals”

Abstract: This paper provides an empirical test in support of carry trade liquidity spirals that result from the mutually reinforcing characteristics of market liquidity and funding liquidity. Volatility increases with market illiquidity, and when markets are illiquid, reductions in funding liquidity can result in liquidity spirals, which increase the negative skewness of speculative asset returns. Conversely, reductions in funding liquidity can reduce market liquidity and induce liquidity spirals, which increase volatility and negative skewness. It is well known that many financial asset return processes exhibit volatility clustering, which can imply an important dependence in the return time path. Since market liquidity and funding liquidity can be mutually reinforcing, liquidity spirals may be related to the dependence in the asset return time path. If liquidity spirals are related to the time dependence, then skewness should also be related. This paper tests this conjecture with a bootstrap or resampling method and rejects in favor of liquidity spirals and time dependence in carry trade returns.

“A Demonstration of Time Varying Volatility and Invalid t-Statistics”

Abstract: This paper demonstrates that using ordinary least squares (OLS) to estimate a model that exhibits time varying volatility can result in invalid t-statistics and a rejection of the true data generating process. Artificial data is simulated for ten separate models that all have the same linear relationship but different volatility structures. Parameters are estimated for each model using both OLS with Huber-White heteroskedasticity consistent standard errors (robust standard errors) and an alternative model that compensates for the time varying volatility. In each case, OLS with robust standard errors rejects the true data generating process by more than the allowed p-value. This result indicates that the efficiency gains from modeling volatility may reverse contemporary findings in economics and finance.

Book Chapters

Herb, Patrick, Shishir Paudel, and Mark Wu. (forthcoming). Bond Auctions.
In: Baker, H. Kent, Greg Filbeck, and Andrew C. Spieler, (Eds.),
Debt Markets and Investments. Oxford University Press, New York, NY.

Work in Progress

“Underpricing in Municipal Bond Auctions”
(w/ Daniel Bergstresser)

“Underpricing and Bidder Allocations in U.S. Treasury Auctions”
(w/ Fan Dora Xia)

“Underpricing and Volatility in Portuguese Treasury Auctions”
(w/ Jose’ Costa, Jose’ Faias and Mark Wu)

“Discriminatory vs. Uniform-Price Portuguese Treasury Auctions”
(w/ Jose’ Costa, Jose’ Faias and Mark Wu)

“Who Profits from U.S. Treasury Auctions?”