Bond Issuance mechanisms and their effects on revenues

Yang, Liyu and De Silva, Dakshina (2020) Bond Issuance mechanisms and their effects on revenues. PhD thesis, Lancaster University.

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Abstract

This thesis consists of three essays on the discussion about superiority among different government security issuance mechanisms: book-building, discriminatory auctions, and uniform auctions. Using a large Chinese government primary and secondary bond market data set, I analyse the revenue rankings of these mechanisms. Results suggest that uniform auctions are superior to book building and discriminatory auctions in generating revenues. Further, results suggest that uniform auctions are better in mitigating bond losses compared to discriminatory auctions. The first essay compares the primary rate between book building and uniform auctions, using data from Chinese local government bonds. Results show that book building procedures lead to a higher primary rate than uniform auction procedures, which reduces the issuers' revenue. These findings are robust across different revenue measurements: primary rates, primary rates normalized by T-bond daily yield rate one day prior to issuance day and primary rates normalized by five days' average T-bond daily yield rate before issuance day. Therefore, uniform auctions generate higher income than book building. The second essay exploits a large-size auction experiment conducted by two Chinese Government bond issuers-the Chinese Development Bank and the Export-Import Bank-to investigate whether Treasury securities should be sold through uniform or discriminatory auction mechanisms. Based on the outcomes of more than 300 Treasury securities issued through an alternating auction-rule market experiment, the study finds that auction outcome yield rates of the two auction formats are not statistically different. Further, these estimates indicate that there is no significant economic difference in terms of revenue between the two auction mechanisms. This result is robust across different bond-yield rate measurements and participation behaviour. The third essay documents the existence of primary dealers' losses in Treasury bond markets and investigates how these losses affect dealers' market value. Using a novel data set that tracks more than 2,350 primary-to-secondary transactions, the study finds that bond losses for primary dealers are prevalent and were severe during the financial crisis. Results indicate that liquidity constraints are a major source of bond losses observed in primary-to-secondary trades. Results also find that financial sector value is correlated with these losses. Using an alternating market experiment, the study shows that bond losses are higher under discriminatory auctions as compared to uniform auctions.