Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?
Article first published online: 21 SEP 2010
© 2010 the American Finance Association
The Journal of Finance
Volume 65, Issue 5, pages 1669–1702, October 2010
How to Cite
GREEN, R. C., LI, D. and SCHÜRHOFF, N. (2010), Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?. The Journal of Finance, 65: 1669–1702. doi: 10.1111/j.1540-6261.2010.01590.x
- Issue published online: 21 SEP 2010
- Article first published online: 21 SEP 2010
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.