IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/10971.html
   My bibliography  Save this paper

Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

Author

Listed:
  • Babina, Tania
  • Jotikasthira, Chotibhak
  • Lundblad, Christian T
  • Ramadorai, Tarun

Abstract

Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-policy-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply and demand, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege policies results in different levels of home-state-biased ownership of local municipal bonds. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to demand and supply variation, heightened sensitivity of muni yields to local political uncertainty, and greater difficulties in raising capital for public projects.

Suggested Citation

  • Babina, Tania & Jotikasthira, Chotibhak & Lundblad, Christian T & Ramadorai, Tarun, 2015. "Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds," CEPR Discussion Papers 10971, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10971
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10971
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    2. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    3. Trzcinka, Charles A, 1982. " The Pricing of Tax-Exempt Bonds and the Miller Hypothesis," Journal of Finance, American Finance Association, vol. 37(4), pages 907-923, September.
    4. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    5. Kidwell, David S & Koch, Timothy W, 1983. "Market Segmentation and the Term Structure of Municipal Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 40-55, February.
    6. Bergstresser, Daniel & Poterba, James, 2004. "Asset allocation and asset location: household evidence from the survey of consumer finances," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1893-1915, August.
    7. Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2010. "A Gap-Filling Theory of Corporate Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 65(3), pages 993-1028, June.
    8. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    9. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-124, March.
    10. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-637, July.
    11. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    12. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    13. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    14. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Taxes on Tax-Exempt Bonds," Journal of Finance, American Finance Association, vol. 65(2), pages 565-601, April.
    15. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    16. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    17. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-1383, September.
    18. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Journal of Finance, American Finance Association, vol. 62(2), pages 557-595, April.
    19. John R. Graham & Mark T. Leary, 2011. "A Review of Empirical Capital Structure Research and Directions for the Future," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 309-345, December.
    20. Lee, David S., 2008. "Randomized experiments from non-random selection in U.S. House elections," Journal of Econometrics, Elsevier, vol. 142(2), pages 675-697, February.
    21. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    22. Sanjiv Ranjan Das & Raman Uppal, 2004. "Systemic Risk and International Portfolio Choice," Journal of Finance, American Finance Association, vol. 59(6), pages 2809-2834, December.
    23. Baxter, Marianne & Jermann, Urban J, 1997. "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, American Economic Association, vol. 87(1), pages 170-180, March.
    24. Mihir A Desai & Dhammika Dharmapala, 2011. "Dividend Taxes and International Portfolio Choice," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 266-284, February.
    25. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, April.
    26. Rydqvist, Kristian & Spizman, Joshua & Strebulaev, Ilya, 2014. "Government policy and ownership of equity securities," Journal of Financial Economics, Elsevier, vol. 111(1), pages 70-85.
    27. Marcin Kacperczyk & Philipp Schnabl, 2013. "How Safe Are Money Market Funds?," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1073-1122.
    28. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    29. Daniel Bergstresser & Randolph Cohen, 2015. "Changing Patterns in Household Ownership of Municipal Debt: Evidence from the 1989-2013 Surveys of Consumer Finances," Working Papers 87, Brandeis University, Department of Economics and International Businesss School.
    30. Poterba, James M. & Samwick, Andrew A., 2003. "Taxation and household portfolio composition: US evidence from the 1980s and 1990s," Journal of Public Economics, Elsevier, vol. 87(1), pages 5-38, January.
    31. Green, Richard C, 1993. "A Simple Model of the Taxable and Tax-Exempt Yield Curves," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 233-264.
    32. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    clientele effects; fire sales; government debt; municipal bonds; ownership segmentation; public finance; Taxes;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:10971. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.