Two essays: On the common information in the return volatilities and volumes; on the informational efficiency of municipal bond market

Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration


Municipal bond, Volatility, Market efficiency, Volume, Common information, Econometrics

Subject Categories

Business | Corporate Finance | Economics | Economic Theory | Social and Behavioral Sciences


Essay I provides a financial theoretical model to explain the empirical phenomena that there is a commonality in the return volatilities and the cross-correlation between volatilities and trading volumes of multiple stocks as documented in the literature. I adopt Tauchen and Pitts (1983) bivariate Mixture-of-Distributions Hypothesis (MDH) Model in which stock return and trading volume are both driven by a latent information arrival process. By extending the MDH model to a multiple-stock context and assuming a factor structure in the unobservable information flows, I find that the rank of the correlation matrix of return volatility and volume is the same as the number of common factors underlying information arrivals. In other words, the commonality in the volatility-volume relationship is captured by the commonality in the latent information arrivals. The model is additionally modified by allowing for the dynamics in the common factor underlying the unobserved information flow. The dynamic factor MDH model in a multiple-stock framework accounts for the stylized facts of stock returns such as volatility clustering. A Bayesian estimation procedure of this model is conducted via Bayesian Monte Carlo Markov Chain (MCMC) method. Empirical analysis of DOW15 stocks is provided to illustrate the methodology.

Essay II tests the market efficiency on the municipal bond market. As the municipal bond market expands in recent years, the market efficiency has become an important issue for investors. No study on the municipal bond market efficiency has been conducted to date due to the lack of transparency and liquidity. However, on January 31, 2005, the Real-time Transaction Reporting System (RTRS) was launched, replacing the daily reporting rule, which requires that all dealers report their transactions within 15 minutes of completion. Trading data are also now widely available through some data vendors. This big move toward the timely reporting system brought the municipal bond market efficiency issue to the forefront because as more "real-time" trading information becomes available, the municipal market is expected to become more transparent. This essay investigates if the municipal market has become more efficient than it was before the reporting rule change. Tests of the serially dependence (both linear and non-linear) of the CBOT Bond Buyer 40 Municipal Bond Index returns were conducted for the periods of before and after the change. Since most of the tests of market efficiency have no power against the alternative of nonlinear dependence with zero-correlation, I conduct the Generalized Spectral test for non-linear forms of the dependence up to the 4 th moment.


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