Trading Activity And Price Volatility in the Municipal Bond Market

Topics:
Commercial Lending
Tags:
Finance,
Investment,
Municipal Bond,
Volatility
Source:
Board of Governors of the Federal Reserve System

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Overview: Utilizing a comprehensive database of transactions in municipal bonds, the paper investigates the volume-volatility relationship in the municipal market. It finds a positive relationship between the number of transaction and a bond’s price volatility. In contrast to previous studies, it finds a negative relationship between average deal size and price volatility. These results are found to be robust throughout the sample. The 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 cost of large transaction.

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Format: PDF | Size: 349KB | Date: Aug 2002 | Pages: 30

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