Working Paper: CEPR ID: DP13301
Authors: Norman Schurhoff; Dan Li; Dario Cestau; Burton Hollifield
Abstract: The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering it a natural laboratory to study financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion and other deviations from the law-of-one- price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technology.
Keywords: municipal bonds; munibond puzzle; over-the-counter markets; trading cost; centrality premium; electronification; green bonds
JEL Codes: G12; G14; G18; G24; G28; H21; H6; H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Effective functioning of the municipal bond market (H74) | Public service provision (H40) |
| Liquidity constraints (E51) | Tax-related inefficiencies in pricing municipal bonds (H20) |
| Tax-related inefficiencies in pricing municipal bonds (H20) | Mispricing of fundamental risks (G19) |
| Regulatory changes aimed at improving market transparency (G18) | Understanding of financial intermediation and asset pricing (G19) |
| Post-crisis regulatory environment and advancements in financial technology (G28) | Market design and performance (D49) |