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Modeling municipal yields with (and without) bond insurance
Chun, A.L. Namvar, E. Ye, Xiaoxia Yu, F.
Chun, A.L.
Namvar, E.
Ye, Xiaoxia
Yu, F.
Publication Date
2019-08
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© 2018 INFORMS. Reproduced in accordance with the publisher's self-archiving policy.
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openAccess
Accepted for publication
07/11/2017
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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).
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Accepted manuscript
Citation
Chun AL, Namvar E, Ye X et al (2019) Modeling municipal yields with (and without) bond insurance. Management Science. 65(8): 3449-3947.
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Article