Testing the Informational Efficiency of Municipal Bond Market

• Activity Number: 473
• Type: Contributed
• Date/Time: Wednesday, August 1, 2007 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economics Statistics Section
• Author(s): Lei Zhang*+ and Chunchi Wu and Raja Velu
• Companies: Syracuse University and Syracuse University and Syracuse University
• Keywords: Generalized Spectral Test ; Nonlinear Dynamics ; Martingale ; Real-time Transaction Reporting System ; Market Efficiency ; Municipal Bond Index

Abstract

Municipal bond market has been known for lack of transparency. However, the Real-time Transaction Reporting System, launched in 2005, replacing the daily reporting rule, requires all the transactions to be reported within 15-minutes of completion. This big move toward the timely reporting system brought the municipal bond market efficiency issue to our attention because with more "real-time" trading information available, the municipal market is expected to become more efficient. In this essay we want to see how this change influences the municipal market return dynamics. Since the available tests of market efficiency have no power against the alternative of nonlinear dependence with zero-correlation, we test both linear and nonlinear dependence of the CBOT Bond Buyer 40 Municipal Bond Index return via Hong's (1999) Generalized Spectral density test.