Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?
Richard C. Green
Carnegie Mellon University - David A. Tepper School of Business
Federal Reserve Board
University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
November 9, 2009
Journal of Finance, Forthcoming
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, G14Accepted Paper Series
Date posted: March 17, 2008 ; Last revised: December 2, 2009
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