33 Pages Posted: 26 Jan 2013
Date Written: January 25, 2013
I examine how liquidity risk affects municipal bond pricing. Liquidity has become a central concern to municipal bond investors, issuers, and regulators since the recent collapse of the monoline municipal bond insurers. The results show that liquidity risk had a minimal effect on yield spreads in the period prior to the insurance collapse, but since that collapse 10-20% of a typical municipal yield spread is due to liquidity risk. These findings have implications for our understanding of the determinants of municipal yield spreads, and for contemporary public policy debates about how to improve the efficiency of the public capital markets.
Keywords: liquidity, municipal securities, fixed income, market microstructure
JEL Classification: H74, G12, G22
Suggested Citation: Suggested Citation