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

We study the price discovery 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. 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. Intra-day price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.