Trading Activity and Price Volatility in the Municipal Bond Market


  • Chris Downing,

  • Frank Zhang

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    • Downing and Zhang are from the Federal Reserve Board. We thank Darrell Ashton and Gillian Burgess for excellent research assistance; the editor and referee for helpful suggestions and comments; and Jim O'Brien, Dan Covitz, Mike Gibson, Song Han, Paul Harrison, Nellie Liang, Matt Pritsker, Steve Sharpe, Dan Sichel, Pat White, and Hao Zhou for useful discussions. This paper represents the views of the authors and does not necessarily represent the views of the Federal Reserve System or members of its staff. Any errors are our own.


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.