Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

Ramadorai, Tarun, Jotikasthira, Chotibhak, Lundblad, Christian and Babina, Tania (2017) Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds. Working Paper.


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.

Item Type: Other Working Paper
Keywords: Government debt, municipal bonds, segmentation, ownership, public finance, fire sales, finance
Subject(s): Finance
Related URLs:
Date Deposited: 07 Jul 2015 08:19
Last Modified: 29 Nov 2018 12:24
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5369

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