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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 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.

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    File URL: http://www.federalreserve.gov/pubs/feds/2002/200239/200239abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2002/200239/200239pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-39.

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    Date of creation: 2002
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    Handle: RePEc:fip:fedgfe:2002-39

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    Keywords: Bonds ; Prices;

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    7. L Paul Hsueh & P. R. Chandy, 1989. "An Examination Of The Yield Spread Between Insured And Uninsured Debt," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 235-244, 09.
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    16. Harris, Lawrence, 1987. "Transaction Data Tests of the Mixture of Distributions Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 127-141, June.
    17. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    18. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
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    20. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-21, March.
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