Stock-Market Yields and the Pricing of Municipal Bonds
This paper proposes an alternative to the traditional model for explaining the spread between taxable and tax-exempt bond yields. This alternative model is a special case of a general class of clientele models of portfolio choice and asset market equilibrium. In particular, we consider a setting with two types of investors, a taxable investor and a tax-exempt investor, who hold specialized bond portfolios. The tax-exempt investor holds only taxable bonds, and the taxable investor holds only tax-exempt bonds. Both investors hold equity, and the taxable and tax-exempt bond markets are linked through the equilibrium conditions governing equity holding and bond holding for each type of investor. In contrast to the traditional model, this alternative model has the potential to explain the small observed spread between taxable and tax-exempt yields. In addition, this model predicts that the yield spread between taxable and tax-exempt bonds should be an increasing function of the dividend yield on corporate stocks. Although the substantial changes in the tax code during the last four decades complicate the testing of this model, we find some support for the predicted relationship between the equity dividend yield and the yield spread between taxable and tax-exempt bonds.
(This abstract was borrowed from another version of this item.)
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1996|
|Date of revision:|
|Contact details of provider:|| Postal: 200 Littauer Center, Cambridge, MA 02138|
Web page: http://www.economics.harvard.edu/journals/hier
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Feldstein & Lawrence H. Summers, 1979.
"Inflation and the Taxation of Capital Income in the Corporate Sector,"
NBER Working Papers
0312, National Bureau of Economic Research, Inc.
- Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 116-152 National Bureau of Economic Research, Inc.
- Whitney K. Newey & Kenneth D. West, 1994.
"Automatic Lag Selection in Covariance Matrix Estimation,"
Review of Economic Studies,
Oxford University Press, vol. 61(4), pages 631-653.
- Newey, W.K. & West, K.D., 1992. "Automatic Lag Selection in Covariance Matrix Estimation," Working papers 9220, Wisconsin Madison - Social Systems.
- Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
- Buser, Stephen A. & Hess, Patrick J., 1986. "Empirical determinants of the relative yields on taxable and tax-exempt securities," Journal of Financial Economics, Elsevier, vol. 17(2), pages 335-355, December.
- James M. Poterba, 1987.
"Tax Policy and Corporate Saving,"
470, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fortune, Peter, 1988. "Municipal Bond Yields: Whose Tax Rates Matter?," National Tax Journal, National Tax Association, vol. 41(2), pages 219-33, June.
- Poterba, James M., 1989.
"Tax reform and the market for tax-exempt debt,"
Regional Science and Urban Economics,
Elsevier, vol. 19(3), pages 537-562, August.
- Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
- James M. Poterba, 1989. "Tax Reform and the Market For Tax-Exempt Debt," NBER Working Papers 2900, National Bureau of Economic Research, Inc.
- Trzcinka, Charles A, 1982. " The Pricing of Tax-Exempt Bonds and the Miller Hypothesis," Journal of Finance, American Finance Association, vol. 37(4), pages 907-23, September.
- Kochin, Levis A & Parks, Richard W, 1988. " Was the Tax-Exempt Bond Market Inefficient or Were Future Expected Tax Rates Negative?," Journal of Finance, American Finance Association, vol. 43(4), pages 913-31, September.
- 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 233-64.
When requesting a correction, please mention this item's handle: RePEc:fth:harver:1761. 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: (Thomas Krichel)
If references are entirely missing, you can add them using this form.