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Do tax‐exempt yields adjust slowly to substantial changes in taxable yields?

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  • Donna Dudney
  • John Geppert

Abstract

This paper examines the profitability of two futures trading strategies: a municipal bond futures contract strategy and a spread strategy consisting of a municipal bond futures contract and a Treasury bond futures contract. Both strategies are designed to exploit a slow municipal yield adjustment following changes in Treasury yields. We find economically significant profits to both strategies. Average holding period returns per trade for both strategies tend to increase with the magnitude of the Treasury yield change. Profit distributions associated with various Treasury yield change thresholds tend to be positively skewed, and median profits are significantly lower than average profits. The profitability results are consistent with slow municipal yield adjustments. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:763–789, 2008

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  • Donna Dudney & John Geppert, 2008. "Do tax‐exempt yields adjust slowly to substantial changes in taxable yields?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(8), pages 763-789, August.
    • Handle: RePEc:wly:jfutmk:v:28:y:2008:i:8:p:763-789
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    Cited by:

    1. Brad A. Badertscher & Dan Givoly & Sharon P. Katz & Hanna Lee, 2019. "Private Ownership and the Cost of Public Debt: Evidence from the Bond Market," Management Science, INFORMS, vol. 65(1), pages 301-326, January.
    2. Dan Givoly & Carla Hayn & Sharon Katz, 2017. "The changing relevance of accounting information to debt holders over time," Review of Accounting Studies, Springer, vol. 22(1), pages 64-108, March.

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