2017/04/06 by Michael Schwert · 2 citations
Economics, Econometrics and Finance · #Credit Risk and Financial Regulations #Fiscal Policies and Political Economy #Housing Market and Economics
paper · doi:10.1111/jofi.12511
openalex publication_date 2017/04/06 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/31
ABSTRACT This paper examines the pricing of municipal bonds. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, and find that default risk accounts for 74% to 84% of the average 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.