Investors’ Financial Health and Municipal Bond Liquidity Risk
45 Pages Posted: 10 Jul 2019
Date Written: June 9, 2019
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: Suggested Citation