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Secondary Trading Costs in the Municipal Bond Market

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Author Info
LAWRENCE E. HARRIS
MICHAEL S. PIWOWAR
Abstract

Using new econometric methods, we separately estimate average transaction costs for over 167,000 bonds from a 1-year sample of all U.S. municipal bond trades. Municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Also, municipal bond trades are substantially more expensive than similar-sized equity trades. We attribute these results to the lack of bond market price transparency. Additional cross-sectional analyses show that bond trading costs increase with credit risk, instrument complexity, time to maturity, and time since issuance. Investors, and perhaps ultimately issuers, might benefit if issuers issued simpler bonds. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00875.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 3 (06)
Pages: 1361-1397
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:bla:jfinan:v:61:y:2006:i:3:p:1361-1397

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  1. Biais, Bruno & Green, Richard, 2007. "The Microstructure of the Bond Market in the 20th Century," IDEI Working Papers 482, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  2. Ricardo Lagos & Guillaume Rocheteau, 2008. "Liquidity in asset markets with search frictions," Staff Report 408, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2008. "Taxes on Tax-Exempt Bonds," NBER Working Papers 14496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Antonio Díaz, 2009. "Retail Investors and the Trading of Treasury Securities," Journal of Financial Services Research, Springer, vol. 36(1), pages 45-63, August. [Downloadable!] (restricted)
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