Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

The distribution of realized stock return volatility

Tania Babina, Chotibhak Jotikasthira, Christian Lundblad and Tarun Ramadorai

The Review of Financial Studies, 2021, vol. 34, issue 1, 509-568

Abstract: We evaluate the impacts of tax policy on asset returns using the U.S. municipal bond market. In theory, tax-induced ownership segmentation limits risk sharing, creating downward-sloping regions of the aggregate demand curve for the asset. In the data, cross-state variation in tax privilege policies predicts differences in in-state ownership of local municipal bonds; the policies create incentives for concentrated local ownership. High tax privilege states have muni bond yields that are more sensitive to variations in supply and local idiosyncratic risk. The effects are stronger when local investors face correlated background risk and/or diminishing marginal nonpecuniary benefits from holding local assets.

JEL-codes: F30 G12 G15 H63 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (20)

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Working Paper: Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds (2015)
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