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Trading Activity and Price Volatility in the Municipal Bond Market

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  • Chris Downing
  • Frank Zhang
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    Abstract

    Utilizing a comprehensive database of transactions in municipal bonds, we investigate the volume-volatility relation in the municipal bond market. We find a positive relation between the number of transactions and a bond's price volatility. In contrast to previous studies, we find a "negative" relation 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 relation. These inconsistencies may arise because current models fail to account for the effects of overall market liquidity on the costs of large transactions. Copyright 2004 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 59 (2004)
    Issue (Month): 2 (04)
    Pages: 899-931

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    Handle: RePEc:bla:jfinan:v:59:y:2004:i:2:p:899-931

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    Cited by:
    1. Brune, Chris & Liu, Pu, 2011. "The contagion effect of default risk insurer downgrades: The impact on insured municipal bonds," Journal of Economics and Business, Elsevier, vol. 63(5), pages 492-502, September.
    2. Junbo Wang & Chunchi Wu & Frank Zhang, 2005. "Liquidity, default, taxes and yields on municipal bonds," Finance and Economics Discussion Series 2005-35, Board of Governors of the Federal Reserve System (U.S.).
    3. McConnell, John J. & Saretto, Alessio, 2010. "Auction failures and the market for auction rate securities," Journal of Financial Economics, Elsevier, vol. 97(3), pages 451-469, September.
    4. Qin Lei & Xuewu Wang, 2012. "Flight to liquidity due to heterogeneity in investment horizon," China Finance Review International, Emerald Group Publishing, vol. 2(2), pages 316-350, August.
    5. Ghulam Sarwar, 2005. "The Informational Role of Option Trading Volume in Equity Index Options Markets," Review of Quantitative Finance and Accounting, Springer, vol. 24(2), pages 159-176, January.
    6. Wang, Junbo & Wu, Chunchi & Zhang, Frank X., 2008. "Liquidity, default, taxes, and yields on municipal bonds," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1133-1149, June.
    7. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Taxes on Tax-Exempt Bonds," Journal of Finance, American Finance Association, vol. 65(2), pages 565-601, 04.
    8. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc.
    9. Ciprian Antoniade Alexandru, 2011. "Dynamic development of municipal bonds on capital markets in Romania and contribution to regional development," ERSA conference papers ersa11p951, European Regional Science Association.
    10. Kao, Erin H. & Fung, Hung-Gay, 2012. "Intraday trading activities and volatility in round-the-clock futures markets," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 195-209.
    11. Bjursell, Johan & Frino, Alex & Tse, Yiuman & Wang, George H.K., 2010. "Volatility and trading activity following changes in the size of futures contracts," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 967-980, December.
    12. Thanasis N. Christodoulopoulos & Ioulia Grigoratou, 2005. "Measuring Liquidity in the Greek Government Securities Market," Working Papers 23, Bank of Greece.

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