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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page 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

Full paper (358 KB PDF)

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Last update: September 4, 2002