Trading Activity and Price Volatility in the Municipal Bond Market

38 Pages Posted: 18 Oct 2002 Last revised: 31 Jan 2008

Chris Downing


Frank Xiaoling Zhang

Morgan Stanley


Utilizing a comprehensive database of transactions in municipal bonds, we investigate the volume-volatility relationship in the muni market. We find a positive relationship between the number of transactions and a bond's price volatility. In contrast to previous studies, we find a negative relationship between average deal size and price volatility. These results are found to be robust throughout the sample. Our results are inconsistent with current theoretical models of the volume-volatility relationship. These inconsistencies may arise because current models fail to account for the effects of overall market liquidity on the costs of large transactions.

Keywords: Municipal, bond, price, volatility, volume

JEL Classification: G10, G18, G20, G28

Suggested Citation

Downing, Chris and Zhang, Frank Xiaoling, Trading Activity and Price Volatility in the Municipal Bond Market. FEDS Working Paper No. 2002-39; Journal of Finance, Vol. 59, No. 2, pp. 899-931. Available at SSRN: or

Christopher T. Downing (Contact Author)

BlackRock ( email )

400 Howard Street
San Francisco, CA 94105
United States

Frank Xiaoling Zhang

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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