Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?


  • Richard C. Green is with the Tepper School of Business at Carnegie Mellon University, Dan Li is with the Board of Governors of the Federal Reserve System, and Norman Schürhoff is with the Faculty of Business and Economics at University of Lausanne, Swiss Finance Institute, and CEPR. The third author acknowledges research support from the Swiss Finance Institute and from NCCR FINRISK of the Swiss National Science Foundation. Seminar participants at Arizona State, Carnegie Mellon, Columbia, George Mason, Lausanne, Miami, Oklahoma, Oxford, and Wharton provided helpful comments and guidance. We greatly appreciate the feedback from our discussants Larry Harris, Adam Kolasinski, and Bruce Lehmann and conference participants at the AFA 2009, EFA 2008, and 2nd Workshop on Financial Market Quality. An anonymous referee and Associate Editor, along with the Editor, Campbell Harvey, have done much to improve the paper. We thank Tal Heppenstall, J.C. Stilley, and Jim Konieczny of University of Pittsburgh Medical Center for conversations that alerted us to the problems studied in this paper.


We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round-trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half-spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.