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Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds

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  • Benson, Earl D.
  • Kidwell, David S.
  • Koch, Timothy W.
  • Rogowski, Robert J.

Abstract

In recent years much research has centered upon whether yield differentials between bonds which differ in default risk vary systematically over the business cycle. Theory suggests that during a cyclical upswing the yield differential (or risk premium) narrows, while during a downswing the differential widens. The cyclical behavior of yield spreads is well documented in the corporate bond market [4, 8, 12, 16]. This effect has only recently been given attention in the tax-exempt bond market [1, 11]. In addition, the municipal bond market may be segmented. If tax-exempt borrowers and investors are unable to substitute between tax-exempt securities of varying default risk, changes in the relative supply of and demand for these classes of securities could produce systematic fluctuations in tax-exempt yield differentials. These effects could be produced by regulatory statutes which require that banks purchase high-grade securities and the fixed nature of bond ratings.

Suggested Citation

  • Benson, Earl D. & Kidwell, David S. & Koch, Timothy W. & Rogowski, Robert J., 1981. "Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(5), pages 685-702, December.
    • Handle: RePEc:cup:jfinqa:v:16:y:1981:i:05:p:685-702_00
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    Cited by:

    1. Barry R. Marks & K. K. Raman, 1988. "The effect of unfunded accumulated and projected pension obligations on governmental borrowing costs," Contemporary Accounting Research, John Wiley & Sons, vol. 4(2), pages 595-608, March.
    2. McConnell, John J. & Saretto, Alessio, 2010. "Auction failures and the market for auction rate securities," Journal of Financial Economics, Elsevier, vol. 97(3), pages 451-469, September.
    3. Zhongxing Wang & Yan Yan & Xiaosong Chen, 2016. "Long-range Correlation and Market Segmentation in Bond Market," Papers 1610.09812, arXiv.org.
    4. W. Brian Barrett & Andrea J. Heuson & Robert W. Kolb, 1986. "The Differential Effects Of Sinking Funds On Bond Risk Premia," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 9(4), pages 303-312, December.
    5. Earl D. Benson & Barry R. Marks & K. K. Raman, 1988. "Tax Effort as an Indicator of Fiscal Stress," Public Finance Review, , vol. 16(2), pages 203-218, April.
    6. Khaled Amira, 2004. "Determinants of Sovereign Eurobonds Yield Spread," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5‐6), pages 795-821, June.

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