Trading Activity and Price Volatility in the Municipal Bond Market
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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Volume (Year): 59 (2004)
Issue (Month): 2 (04)
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