Municipal Bond Liquidity and Default Risk

Michael Schwert

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: This paper examines the pricing of bonds issued by states and local governments. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, finding that default risk accounts for 74% to 84% of the average municipal bond spread after adjusting for tax-exempt status. The first approach estimates the liquidity component using transaction data, the second measures the default component with credit default swap data, and the third is a quasi-natural experiment that estimates changes in default risk around pre-refunding events. The price of default risk is high given the rare incidence of municipal default and implies a high risk premium.

JEL-codes: G12 H74 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (5)

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Journal Article: Municipal Bond Liquidity and Default Risk (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2016-16

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