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Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds

Published online by Cambridge University Press:  06 April 2009

Earl D. Benson ,
David S. Kidwell ,
Timothy W. Koch  and
Robert J. Rogowski
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Extract

In recent years much research has centered upon whether yield differentials between bonds which differ in default risk vary systematically over the business cycle. Theory suggests that during a cyclical upswing the yield differential (or risk premium) narrows, while during a downswing the differential widens. The cyclical behavior of yield spreads is well documented in the corporate bond market [4, 8, 12, 16]. This effect has only recently been given attention in the tax-exempt bond market [1, 11]. In addition, the municipal bond market may be segmented. If tax-exempt borrowers and investors are unable to substitute between tax-exempt securities of varying default risk, changes in the relative supply of and demand for these classes of securities could produce systematic fluctuations in tax-exempt yield differentials. These effects could be produced by regulatory statutes which require that banks purchase high-grade securities and the fixed nature of bond ratings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 16 , Issue 5 , December 1981 , pp. 685 - 702
Copyright
Copyright © School of Business Administration, University of Washington 1981

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References

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