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    Modeling municipal yields with (and without) bond insurance

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    Publication date
    2019-08
    Author
    Chun, A.L.
    Namvar, E.
    Ye, Xiaoxia
    Yu, F.
    Keyword
    Municipal bonds; Bond insurance; Monoline; Default risk; Liquidity risk; Term structure modeling
    Rights
    © 2018 INFORMS. Reproduced in accordance with the publisher's self-archiving policy.
    Peer-Reviewed
    Yes
    
    Metadata
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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).
    URI
    http://hdl.handle.net/10454/14041
    Version
    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.
    Link to publisher’s version
    https://doi.org/10.1287/mnsc.2017.3007
    Type
    Article
    Collections
    Management and Law Publications

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