Investors’ Financial Health and Municipal Bond Liquidity Risk

45 Pages Posted: 10 Jul 2019

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University

Pingyi Lou

Fudan University - School of Economics

Date Written: June 9, 2019

Abstract

This study examines whether the financial health of municipal bond investors can affect the municipal bond yield by especially focusing on the liquidity component. We find that the deterioration of the financial health of bond investors widens the liquidity spread of municipal bonds, and this relationship was stronger during the Lehman crisis. Using Hurricane Sandy as an exogenous shock to the financial health of insurers, we find that the municipal bonds held by insurers, who suffered losses due to the hurricane, experienced a larger increase in liquidity spreads in the quarter of Hurricane Sandy. We further find that insurers affect the liquidity spreads of municipal bonds by affecting the pure liquidity cost and commonality.

Keywords: insurance companies, municipal bonds, risk premium, liquidity

JEL Classification: G22, G12, H74

Suggested Citation

Chen, Tao and Kamiya, Shinichi and Lou, Pingyi, Investors’ Financial Health and Municipal Bond Liquidity Risk (June 9, 2019). Available at SSRN: https://ssrn.com/abstract=3416974 or http://dx.doi.org/10.2139/ssrn.3416974

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Shinichi Kamiya

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Pingyi Lou (Contact Author)

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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