Secondary Trading Costs in the Municipal Bond Market

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...

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Bibliographic Details
Published in:The Journal of finance (New York) 2006-06, Vol.61 (3), p.1361-1397
Main Authors: HARRIS, LAWRENCE E., PIWOWAR, MICHAEL S.
Format: Article
Language:English
Subjects:
Bond issues
Bond market
Bond markets
Capital market
Corporate bonds
Correlation analysis
Cost estimates
Cost estimation models
Cost functions
Customers
Econometrics
Empirical tests
Financial economics
Government bonds
Municipal bonds
Studies
Trade
Transaction costs
U.S.A
Valuation
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Summary: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.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2006.00875.x