Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

Christian T Lundblad, Chotibhak Jotikasthira and Tania Babina
Authors registered in the RePEc Author Service: Tarun Ramadorai

No 10971, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege results in different levels of in-state ownership. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to supply variation and heightened sensitivity of muni yields to local political uncertainty.

Keywords: Clientele effects; Fire sales; Government debt; Municipal bonds; Ownership segmentation; Public finance; Taxes (search for similar items in EconPapers)
JEL-codes: F30 G12 G15 H63 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds (2021)
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