Fractionalization and the Municipal Bond Market
43 Pages Posted: 18 May 2011 Last revised: 21 Jun 2011
Date Written: May 17, 2011
We study the impact of ethnic and religious fractionalization on the U.S. municipal debt market, and find that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a ten basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA-, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds, but instead reflects inefficiency in the underwriting process.
Keywords: Fractionalization, municipal bonds
JEL Classification: H74
Suggested Citation: Suggested Citation