Auction design and bidding strategy for the note issuance facility

Abstract

Three auctioning methods are considered for the Note Issuance Facility. They are (i) the discriminatory auction where each winning bidder is paid his own interest rate bid, (ii) the stop-out-rate auction where all winners are paid the interest rate that clears the market, and (iii) the lowest-rejected-bid auction in which all winners are paid the lowest rejected interest rate bid. For each auctioning method, the bidder's optimal bidding strategy is derived and the note issuer's corresponding expected interest rate is obtained. The results under these three auctioning methods are then compared. © 1990 School of Management National University of Singapore.