Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

56 Pages Posted: 17 Mar 2008 Last revised: 2 Dec 2009

See all articles by Richard C. Green

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Dan Li

Federal Reserve Board

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Date Written: November 9, 2009

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.

Keywords: Municipal Bond, Price Discovery, Market Microstructure, Liquidity, Asymmetric Adjustment

JEL Classification: D40, G14

Suggested Citation

Green, Richard C. and Li, Dan and Schürhoff, Norman, Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall? (November 9, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1102503

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business ( email )

315B Schenley Park
Pittsburgh, PA 15213-3890
United States
412-268-2302 (Phone)
412-268-7064 (Fax)

Dan Li (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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