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
Date Written: November 9, 2009
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: Suggested Citation