Finance and Economics Discussion Series (FEDS)
September 2002
Trading Activity and Price Volatility in the Municipal Bond Market
Chris Downing and Frank Zhang
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.
Keywords: Municipal bond, price, volatility, volume
PDF: Full Paper
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