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

In OTC bond markets many investors face high costs of trade, and these costs appear to berelated to the lack of price transparency. We study the consequences this has for efficient pricediscovery. Prices of municipal bonds react sluggishly to macroeconomic news. Yield spreads overtreasuries react dramatically to news because treasury yields move and municipal yields do not. Asin consumer markets, prices appear to “rise faster than they fall.” Round-trip profits to dealers onretail trades increase in rising markets but do not decrease in falling markets.[...]