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Secondary Trading Costs in the Municipal Bond Market




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    • Larry Harris is the Fred V. Keenan Chair in Finance at the Marshall School of Business, University of Southern California. Much of this research was conducted while he was Chief Economist of the U.S. Securities and Exchange Commission. Mike Piwowar is a Financial Economist in the SEC Office of Economic Analysis. We thank the anonymous referee, Vance Anthony, Bill Dale, Amy Edwards, Clifton Green, Martha Haines, Hal Johnson, Larry Lawrence, Janice Mitnick, Art Warga, and Mark Zehner for their suggestions and assistance with this project. We also thank seminar participants at the SEC, the University of Maryland, the University of Southern California, Emory University, and Arizona State University and conference participants at the Bank of Canada Workshop on Regulation, Transparency and the Quality of Fixed Income Markets, the Vanderbilt University FMRC Conference on Exchange Governance and Securities Market Structure, and the Q Group Fall 2004 Research Seminar. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or of the authors' colleagues upon the staff of the Commission. All errors and omissions are the sole responsibility of the authors.


Using new econometric methods, we separately estimate average transaction costs for over 167,000 bonds from a 1-year sample of all U.S. municipal bond trades. Municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Also, municipal bond trades are substantially more expensive than similar-sized equity trades. We attribute these results to the lack of bond market price transparency. Additional cross-sectional analyses show that bond trading costs increase with credit risk, instrument complexity, time to maturity, and time since issuance. Investors, and perhaps ultimately issuers, might benefit if issuers issued simpler bonds.

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