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Trading activity and price volatility in the municipal bond market

Listed author(s):
  • Chris Downing
  • Frank X. Zhang
Registered author(s):

    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/2002/200239/200239pap.pdf
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    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
    Handle: RePEc:fip:fedgfe:2002-39
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