Modeling Municipal Yields with (and without) Bond Insurance

61 Pages Posted: 12 Oct 2015 Last revised: 30 Oct 2018

See all articles by Albert Lee Chun

Albert Lee Chun

University of Queensland - Business School; Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Ethan Namvar

University of California, Berkeley - Haas School of Business; Columbia Business School

Xiaoxia Ye

University of Liverpool Management School

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: May 30, 2017

Abstract

We develop an intensity-based model of municipal yields, making simultaneous use of the CDS premiums of the insurers and both insured and uninsured municipal bond transactions. We estimate the model individually for 61 municipal issuers by exploiting the dramatic decline in credit quality of the bond insurers from July 2007 to June 2008, and decompose the municipal yield spread based on the estimated parameters. The decomposition reveals a dominant role of the liquidity component as well as interactions between liquidity and default similar to those modeled by Chen et al. (2016) for corporate bonds. Towards the end of the sample period, our model also reproduces the "yield inversion" phenomenon documented by Bergstresser et al. (2010).

Keywords: Municipal bonds; bond insurance; monoline; default risk; liquidity risk; term structure modeling

Suggested Citation

Chun, Albert Lee and Namvar, Ethan and Ye, Xiaoxia and Yu, Fan, Modeling Municipal Yields with (and without) Bond Insurance (May 30, 2017). Forthcoming, Management Science; Claremont McKenna College Robert Day School of Economics and Finance Research Paper. Available at SSRN: https://ssrn.com/abstract=2672364 or http://dx.doi.org/10.2139/ssrn.2672364

Albert Lee Chun

University of Queensland - Business School ( email )

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Ethan Namvar

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7989 (Phone)

HOME PAGE: http://haas.berkeley.edu

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Xiaoxia Ye (Contact Author)

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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