Treasury auction method and underpricing: Evidence from Iceland

Abstract

The Central Bank of Iceland replaced the discriminatory method used for auctioning treasury securities with the uniform‐price method in 2009. We analyze underpricing before and after this institutional reform with a sample of 516 auctions organized from 2000 to 2018. After controlling for auction characteristics and financial market conditions, we find that underpricing is lower under the uniform‐price method. However, this underpricing decline does not translate into a reduction in sovereign issuance cost. The emergence of overpricing, observed in the late part of our sample, coincides with the growing importance of commissions paid to primary dealers. Our results provide practical implications for governments, regulators, and market participants.