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Journal of Finance Vol. 65 No. 5 2010

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

Richard C. Green1; Dan Li2,3; Norman Schürhoff4,5,6

1 Carnegie Mellon University · 2 Federal Reserve · 3 Federal Reserve Board of Governors · 4 Centre for Economic Policy Research · 5 Swiss Finance Institute · 6 University of Lausanne

open access

Abstract

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.

DOI
10.1111/j.1540-6261.2010.01590.x
Volume
65
Issue
5
Pages
1669-1702
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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