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Municipal Bond Liquidity Before and After the Financial Crisis

Justin Marlowe

University of Washington

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.

Number of Pages in PDF File: 33

Keywords: liquidity, municipal securities, fixed income, market microstructure

JEL Classification: H74, G12, G22

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Date posted: January 26, 2013  

Suggested Citation

Marlowe, Justin, Municipal Bond Liquidity Before and After the Financial Crisis (January 25, 2013). Available at SSRN: https://ssrn.com/abstract=2206730 or http://dx.doi.org/10.2139/ssrn.2206730

Contact Information

Justin Marlowe (Contact Author)
University of Washington ( email )
Box 353055
Seattle, WA 98195
United States
206.221.4161 (Phone)
HOME PAGE: http://evans.washington.edu/faculty-staff/bios/current-hz/marlowe
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