Municipal Bond Liquidity

59 Pages Posted: 17 Feb 2004

See all articles by Lawrence Harris

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable

Michael S. Piwowar

Government of the United States of America - Banking Committee

Date Written: February 13, 2004

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

Suggested Citation

Harris, Lawrence and Piwowar, Michael S., Municipal Bond Liquidity (February 13, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=503062 or http://dx.doi.org/10.2139/ssrn.503062

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)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
P.O. Box 1540
Valley Stream, NY 11582
United States

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
10th Floor
Chicago, IL 60604
United States

University of Pennsylvania - Financial Economists Roundtable ( email )

Philadelphia, PA
United States

Michael S. Piwowar (Contact Author)

Government of the United States of America - Banking Committee ( email )

Washington, DC
United States

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