1932

Abstract

The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering the municipal bond market a natural laboratory for the study of financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion, and other deviations from the law of one price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technology.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110118-123034
2019-12-26
2024-07-24
Loading full text...

Full text loading...

/deliver/fulltext/financial/11/1/annurev-financial-110118-123034.html?itemId=/content/journals/10.1146/annurev-financial-110118-123034&mimeType=html&fmt=ahah

Literature Cited

  1. Adelino M, Cunha I, Ferreira MA 2017. The economic effects of public financing: evidence from municipal bond ratings recalibration. Rev. Financ. Stud. 30:3223–68
    [Google Scholar]
  2. Ang A, Bhansali V, Xing Y 2010. Taxes on tax-exempt bonds. J. Finance 65:565–601
    [Google Scholar]
  3. Ang A, Longstaff FA. 2013. Systemic sovereign credit risk: lessons from the US and Europe. J. Monetary Econ. 60:493–510
    [Google Scholar]
  4. Appleson J, Parsons E, Haughwout AF 2012. The untold story of municipal bond defaults. Liberty Street Economics Blog, Federal Reserve Bank, New York https://libertystreeteconomics.newyorkfed.org/2012/08/the-untold-story-of-municipal-bond-defaults.html
    [Google Scholar]
  5. Babina T, Jotikasthira C, Lundblad C, Ramadorai T 2019. Heterogeneous taxes and limited risk sharing: evidence from municipal bonds Work. Pap., Southern Methodist Univ Dallas, TX:
    [Google Scholar]
  6. Babus A. 2012. Endogenous intermediation in over-the-counter markets Work. Pap., Federal Reserve Bank, Chicago
    [Google Scholar]
  7. Baker M, Bergstresser D, Serafeim G, Wurgler J 2018. Financing the response to climate change: the pricing and ownership of U.S. green bonds Work. Pap., NBER Cambridge, MA:
    [Google Scholar]
  8. Benveniste LM, Spindt PA. 1989. How investment bankers determine the offer price and allocation of new issues. J. Financ. Econ. 24:343–61
    [Google Scholar]
  9. Benveniste LM, Wilhelm WJ. 1990. A comparative analysis of IPO proceeds under alternative regulatory environments. J. Financ. Econ. 28:173–207
    [Google Scholar]
  10. Bergstresser D, Cohen R, Shenai S 2010. Financial guarantors and the 2007–2009 credit crisis Work. Pap. 11-051, Harvard Bus. Sch Cambridge, MA:
    [Google Scholar]
  11. Biais B, Green RC. 2019. The microstructure of the bond market in the 20th century. Rev. Econ. Dyn. 33:250–71
    [Google Scholar]
  12. Cestau D. 2018. The political affiliation effect on state credit risk. Public Choice 175:135–54
    [Google Scholar]
  13. Cestau D, Green RC, Schürhoff N 2013. Tax-subsidized underpricing: the market for Build America bonds. J. Monet. Econ. 60:593–608
    [Google Scholar]
  14. Cestau D, Hollifield B, Green RC, Schürhoff N 2018. The cost burden of negotiated sales restrictions: a natural experiment using heterogeneous state laws Work. Pap., Swiss Finance Inst Geneva:
    [Google Scholar]
  15. Chalmers JMR. 1998. Default risk cannot explain the muni puzzle: evidence from municipal bonds that are secured by US treasury obligations. Rev. Financ. Stud. 11:281–308
    [Google Scholar]
  16. Chang B, Zhang S. 2015. Endogenous market making and network formation Work. Pap., Univ Wis., Madison:
    [Google Scholar]
  17. Cheng IH, Milbradt K. 2012. The hazards of debt: rollover freezes, incentives, and bailouts. Rev. Financ. Stud. 25:1070–110
    [Google Scholar]
  18. Cole CW, Officer DT. 1981. The interest cost effect of private municipal bond insurance. J. Risk Insur. 48:435–49
    [Google Scholar]
  19. Cornaggia J, Cornaggia KJ, Israelsen RD 2017. Credit ratings and the cost of municipal financing. Rev. Financ. Stud. 31:2038–79
    [Google Scholar]
  20. Dagostino R. 2018. The impact of bank financing on municipalities bond issuance and the real economy Work. Pap., Univ Rochester, Rochester, NY:
    [Google Scholar]
  21. De Angelis M, Tian X 2013. Municipal bankruptcy—utilization, avoidance, and impact. Until Debt Do Us Part: Subnational Debt, Insolvency, and Markets, ed. O Canuto, L Liu311–53 Washington, DC: World Bank
    [Google Scholar]
  22. Degeorge F, Derrien F, Womack KL 2007. Analyst hype in IPOs: explaining the popularity of bookbuilding. Rev. Financ. Stud. 20:1021–58
    [Google Scholar]
  23. Di Maggio M, Kermani A, Song Z 2015. The value of trading relationships in turbulent times. Work. Pap., Columbia Bus. Sch New York:
  24. Dick-Nielsen J, Feldhütter P, Lando D 2012. Corporate bond liquidity before and after the onset of the subprime crisis. J. Financ. Econ. 103:471–92
    [Google Scholar]
  25. Duffie D, Gârleanu N, Pedersen LH 2005. Over-the-counter markets. Econometrica 73:1815–47
    [Google Scholar]
  26. Garrett D, Roberts JW, Ordin A, Suarez Serrato JC 2017. Tax advantages and imperfect competition in auctions for municipal bonds Work. Pap., Duke Univ Durham, NC:
    [Google Scholar]
  27. Glass C III 1946. A review of intergovernmental immunities from taxation. Wash. Lee Law Rev. 4:48–68
    [Google Scholar]
  28. Gore AK, Sachs K, Trzcinka C 2004. Financial disclosure and bond insurance. J. Law Econ. 47:275–306
    [Google Scholar]
  29. Green RC. 1993. A simple model of taxable and tax-exempt yield curves. Rev. Financ. Stud. 6:233–64
    [Google Scholar]
  30. Green RC, Hollifield B, Schürhoff N 2007a. Dealer intermediation and price behavior in the aftermarket for new bond issues. J. Financ. Econ. 86:643–82
    [Google Scholar]
  31. Green RC, Hollifield B, Schürhoff N 2007b. Financial intermediation and the costs of trading in an opaque market. Rev. Financ. Stud. 20:275–314
    [Google Scholar]
  32. Green RC, Li D, Schürhoff N 2010. Price discovery in illiquid markets: Do financial asset prices rise faster than they fall. J. Finance 65:1669–702
    [Google Scholar]
  33. Han S, Li D. 2010. The fragility of discretionary liquidity provision—lessons from the collapse of the auction rate securities market HKIMR Work. Pap. Ser. 2010-50, Fed. Reserve Washington, DC:
    [Google Scholar]
  34. Harris LE, Piwowar MS. 2006. Secondary trading costs in the municipal bond market. J. Finance 61:1361–97
    [Google Scholar]
  35. He Z, Milbradt K. 2014. Endogenous liquidity and defaultable bonds. Econometrica 82:1443–508
    [Google Scholar]
  36. Hollifield B, Neklyudov A, Spatt C 2017. Bid-ask spreads, trading networks, and the pricing of securitizations. Rev. Financ. Stud. 30:3048–85
    [Google Scholar]
  37. Hugonnier J, Lester B, Weill PO 2015. Heterogeneity in decentralized asset markets Work. Pap., Swiss Finance Inst Geneva:
    [Google Scholar]
  38. Jagannathan R, Jirnyi A, Sherman AG 2015. Share auctions of initial public offerings: global evidence. J. Financ. Intermed. 24:283–311
    [Google Scholar]
  39. Johnson ED, Young EA. 2011. The constitutional law of state debt. Duke J. Const. Law Public Policy 7:117–62
    [Google Scholar]
  40. Kidwell DS, Sorensen EH, Wachowicz JM 1987. Estimating the signaling benefits of debt insurance: the case of municipal bonds. J. Financ. Quant. Anal. 22:299–313
    [Google Scholar]
  41. Landoni M. 2018. Tax distortions and bond issue pricing. J. Financ. Econ. 129:382–93
    [Google Scholar]
  42. Li D, Schürhoff N. 2019. Dealer networks. J. Finance 94:91–144
    [Google Scholar]
  43. Liu L, Tian X, Wallis JJ 2013. Caveat creditor: state systems of local government borrowing in the United States. Until Debt Do Us Part: Subnational Debt, Insolvency, and Markets O Canuto, L Liu 539–90 Washington, DC: World Bank
    [Google Scholar]
  44. Longstaff FA. 2011. Municipal debt and marginal tax rates: Is there a tax premium in asset prices. J. Finance 66:721–51
    [Google Scholar]
  45. Loughran T, Ritter J. 2004. Why has IPO underpricing changed over time. Financ. Manag. 33:5–37
    [Google Scholar]
  46. Marlowe J. 2015. Municipal bonds and infrastructure development—past, present, and future Work. Pap., Int. City/County Manag. Assoc Washington, DC:
    [Google Scholar]
  47. McConnell JJ, Saretto A. 2010. Auction failures and the market for auction rate securities. J. Financ. Econ. 97:451–69
    [Google Scholar]
  48. Moody's 2017. US municipal bond defaults and recoveries, 1970–2016 Tech. Rep., Moody's Invest. Serv New York:
    [Google Scholar]
  49. Nanda V, Singh R. 2004. Bond insurance: What is special about munis. J. Finance 59:2253–80
    [Google Scholar]
  50. Neklyudov A. 2019. Bid-ask spreads and the over-the-counter interdealer markets: core and peripheral dealers. Rev. Econ. Dyn. 33:57–84
    [Google Scholar]
  51. Neupane S, Marshall A, Paudyal K, Thapa C 2017. Do investors flip less in bookbuilding than in auction IPOs. J. Corp. Finance 47:253–68
    [Google Scholar]
  52. Powell TR. 1945. The waning of intergovernmental tax immunities. Harvard Law Rev 58:633–74
    [Google Scholar]
  53. Ritter JR, Welch I. 2002. A review of IPO activity, pricing, and allocations. J. Finance 57:1795–828
    [Google Scholar]
  54. Sambalaibat B. 2015. Endogenous specialization and dealer networks Work. Pap., Indiana Univ Bloomington:
    [Google Scholar]
  55. Schultz P. 2012. The market for new issues of municipal bonds: the roles of transparency and limited access to retail investors. J. Financ. Econ. 106:492–512
    [Google Scholar]
  56. Schultz P. 2013. State taxes, limits to arbitrage, and differences in municipal bond yields across states Tech. Rep., Notre Dame Univ Notre Dame, IN:
    [Google Scholar]
  57. Schwert M. 2017. Municipal bond liquidity and default risk. J. Finance 72:1683–722
    [Google Scholar]
  58. Spatt C, Srivastava S. 1991. Preplay communication, participation restrictions, and efficiency in initial public offerings. Rev. Financ. Stud. 4:709–26
    [Google Scholar]
  59. Thakor AV. 1982. An exploration of competitive signalling equilibria with third party information production: the case of debt insurance. J. Finance 37:717–39
    [Google Scholar]
  60. Üslü S. 2015. Pricing and liquidity in decentralized asset markets Work. Pap., Univ. Calif Los Angeles:
    [Google Scholar]
  61. Vayanos D, Wang T. 2007. Search and endogenous concentration of liquidity in asset markets. J. Econ. Theory 136:66–104
    [Google Scholar]
  62. Wang C. 2016. Core-periphery trading networks Work. Pap., Stanford Univ Stanford, CA:
    [Google Scholar]
  63. Wang J, Wu C, Zhang FX 2008. Liquidity, default, taxes, and yields on municipal bonds. J. Bank. Finance 32:1133–49
    [Google Scholar]
  64. Weller BM. 2013. Fast and slow liquidity Work. Pap., Northwestern Univ Evanston, IL:
    [Google Scholar]
  65. Wilkoff SM. 2013. The effect of insurance on municipal bond yields Work. Pap., Secur. Exch. Comm Washington, DC:
    [Google Scholar]
/content/journals/10.1146/annurev-financial-110118-123034
Loading
/content/journals/10.1146/annurev-financial-110118-123034
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error