Comparison of two parameterizations of the winner's curse model in a sample of Swedish Treasury auctions

Purpose – The purpose of this paper is to examine the underpricing effect in Treasury auctions. Design/methodology/approach – The paper compares two winner's curse models using a dataset on multi‐unit auctions. The dataset is from Swedish Treasury auctions, which is under a discriminatory auction mechanism. One model is a single‐unit equilibrium model assuming that each bidder bids for 100 percent of the auctioned securities, which is described by Wilson and solved by Levin and Smith. The other model is a multi‐unit model calibrated by Goldreich using the US Treasury auctions data and assumes that each bidder bids for one unit of the auctioned securities. Findings – The empirical results show that, although both models work well in predicting the bid‐shading, the multi‐unit model fits the Swedish Treasury auctions data better than the single‐unit model. Research limitations/implications – The evidence implies that bidders rationally adjust their bids due to the winner's curse/champion's plague. Originality/value – This study provides close quantitative predictions of the amount of bid‐shading using both single‐unit model of Wilson and multi‐unit model of Goldreich, and indicates that winner's curse or champion's plague worries bidders in countries other than the USA.