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An Empirical Test of Auction Methods in the Primary Market of Sovereign Debt

There has been a long debate as to which of the most extended systems, the uniform system or the discriminatory price system, is the most appropriate for central banks and debt management offices issuing sovereign bonds. The purpose of this paper is to shed light on this question. The main variables to explore the auction mechanisms are the price difference between the primary and secondary markets (price spread) and the coverage ratio. Subsequently, to determine patterns for clarifying which auction system is optimal, we propose a new model based on the price spread and the model for financial options proposed by Bachelier (1900). We conclude that the auction method and the number of primary dealers are relevant parameters in the auction outcome. Finally, the results of the new model are the cornerstone for identifying detailed patterns followed by top-performing countries.