Financial Innovations and Issuer Sophistication in Municipal Securities Markets

Stephan Whitaker

No 1404, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: When local governments default or file for bankruptcy, it is often because public officials misunderstood the risks associated with innovative financial products. If unsophisticated municipal bond issuers were to widely adopt a high risk financial product, this could harm taxpayers and investors, as well as destabilize the financial system. This analysis uses municipal bond issuers? total debt outstanding as a proxy for their sophistication and investigates the relationship between sophistication and adoption of financial innovations. Using comprehensive data on securities issued between 1992 and 2012, 25 innovations are identified. Products with these features were uncommon in the 1990s, and expanded their market share after 2000. The 600 issuers that back 75 percent of the outstanding debt adopted 21 innovations for a greater fraction of their new issuance, relative to the approximately 40,000 smaller market participants. When innovation-linked debt issuance is measured relative to annual expenditures, the mid-level jurisdictions adopted innovations to a significantly greater extent than either states and sophisticated jurisdictions or unsophisticated jurisdictions. The results suggest oversight should be concentrated on mid-level local governments where past innovations have made the greatest inroads.

Keywords: Financial innovation; Public financial management; Municipal bonds (search for similar items in EconPapers)
JEL-codes: G28 H74 R51 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-201404 Persistent link
https://www.clevelandfed.org/-/media/project/cleve ... ties-markets-pdf.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1404

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-201404

Access Statistics for this paper

More papers in Working Papers (Old Series) from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().