Working Paper: NBER ID: w31389
Authors: Matthias Fleckenstein; Francis A. Longstaff
Abstract: We study the valuation of state-issued tax-exempt municipal bonds and find that there are significant convenience premia in their prices. These premia parallel those identified in Treasury markets. We find evidence that these premia are tax related. Specifically, the premia are related to measures of tax and fiscal uncertainty, forecast flows into state municipal bond funds, and are directly linked to outmigration from high-tax to low-tax states and to other measures of tax aversion such as IRA and retirement plan contributions. These results suggest that investors are willing to pay a substantial premium to avoid taxes.
Keywords: No keywords provided
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax-related convenience premia in municipal bond prices (H20) | convenience premium (D11) |
| tax and fiscal uncertainty measures (H29) | convenience premium (D11) |
| changes in the SALT deduction (H20) | convenience premium (D11) |
| increases in convenience premia (D11) | net inflows into municipal bond funds (H74) |
| outmigration rates to low-tax states (H73) | convenience premium (D11) |
| taxpayer behaviors (IRA contributions and itemized deductions) (H32) | convenience premium (D11) |