Trading Ahead of Treasury Auctions

I develop and test a model explaining the gradual price decrease observed in the days leading to large anticipated asset sales such as Treasury auctions. In the model, risk-averse investors anticipate an asset sale which magnitude, and hence price, are uncertain. I show that investors face a trade-off between hedging the price risk with a long position, and speculating on the difference between the pre-sale and the expected sale prices. Due to hedging, the equilibrium price is above the expected sale price. As the sale date approaches, uncertainty about the sale price decreases, short speculative positions increase and the price decreases. In line with the predictions, I find that the yield of Italian Treasuries increases by 1.2 bps after the release of auction price information, compared to non-information days.