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Municipal Bond Liquidity

Lawrence Harris
University of Southern California - Marshall School of Business - Finance and Business Economics Department

Michael S. Piwowar
Government of the United States of America - Banking Committee


February 13, 2004

AFA 2005 Philadelphia Meetings

Abstract:     
Using new econometric methods, we separately estimate average transaction costs, as a function of trade size, for over 167,000 bonds from a one-year sample of all U.S. municipal bond trades. Unlike in equities, municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Municipal bond trades are also substantially more expensive than similar sized equity trades. We attribute these results to the general lack of price transparency in the bond markets. Additional cross-sectional analyses show that bond liquidity increases with credit quality and decreases with instrument complexity, time to maturity, and time since issuance. The results suggest that investors, and perhaps ultimately issuers, could benefit if issuers issued simpler bonds.

Keywords: Municipal bonds, fixed income, liquidity, transaction cost measurement, effective spreads, Municipal Securities Rulemaking Board, MSRB, transparency, market microstructure, dealers

Working Paper Series

Date posted: February 17, 2004 ; Last revised: December 13, 2004

Suggested Citation

Harris, Lawrence and Piwowar, Michael S., Municipal Bond Liquidity (February 13, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: http://ssrn.com/abstract=503062


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Contact Information

Michael S. Piwowar (Contact Author)
Government of the United States of America - Banking Committee ( email )
Washington, DC United States
Lawrence Harris
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)
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