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

Richard Green, Dan Li and Norman Schürhoff
Authors registered in the RePEc Author Service: Norman Schuerhoff ()

Journal of Finance, 2010, vol. 65, issue 5, 1669-1702

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.

Date: 2010
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Handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1669-1702