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Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?Richard C. GreenCarnegie Mellon University - David A. Tepper School of Business Dan LiFederal Reserve Board Norman SchürhoffUniversity of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR) November 9, 2009 Journal of Finance, Forthcoming Abstract: We study the price discovery of municipal bonds, an important OTC market. As in markets for consumer goods, prices "rise faster than they fall." Round-trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Effective half-spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to treasuries also adjust with asymmetric speed in rising and falling markets. Intra-day price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.
Number of Pages in PDF File: 56 Keywords: Municipal Bond, Price Discovery, Market Microstructure, Liquidity, Asymmetric Adjustment JEL Classification: D40, G14 Accepted Paper SeriesDate posted: March 17, 2008 ; Last revised: December 2, 2009Suggested CitationContact Information
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