DP13301 Municipal Bond Markets

Author(s): Dario Cestau, Burton Hollifield, Dan Li, Norman Schürhoff
Publication Date: November 2018
Keyword(s): centrality premium, electronification, green bonds, muni-bond puzzle, Municipal Bonds, Over-the-counter markets, trading cost
JEL(s): G12, G14, G18, G24, G28, H21, H6, H7
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13301

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.