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Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds
- Source :
- The Review of Financial Studies. 34:509-568
- Publication Year :
- 2020
- Publisher :
- Oxford University Press (OUP), 2020.
-
Abstract
- Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege results in different levels of in-state ownership. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to supply variation and heightened sensitivity of muni yields to local political uncertainty.
- Subjects :
- Economics and Econometrics
Economics
DEMAND
Government debt
Social Sciences
1401 Economic Theory
ASSET PRICES
Microeconomics
Business & Economics
Accounting
Systematic risk
SIMPLE-MODEL
Asset (economics)
1402 Applied Economics
Aggregate demand
US
Political risk
Bond
1502 Banking, Finance and Investment
LIQUIDITY
Business, Finance
DEBT
CORPORATE YIELD SPREADS
Municipal bond
MARKET-SEGMENTATION
EQUILIBRIUM
PORTFOLIO CHOICE
Business
Finance
Public finance
Subjects
Details
- ISSN :
- 14657368 and 08939454
- Volume :
- 34
- Database :
- OpenAIRE
- Journal :
- The Review of Financial Studies
- Accession number :
- edsair.doi.dedup.....d78bfd141eb7d1fc6b76bef6daf9bb9e