Demographic Fractionalization and the Municipal Bond Market

Daniel Bergstresser, Randolph Cohen and Siddharth Shenai

Municipal Finance Journal, 2013, vol. 34, issue 3, 1 - 38

Abstract: This paper studies the impact of ethnic and religious fractionalization on the U.S. municipal debt market and finds that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a 10 basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA–, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds but reflects, instead, inefficiency in the underwriting process.

Date: 2013
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