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Municipal Bond Demand Premiums and Bond Price Volatility: A Note
Author(s) -
STOCK DUANE,
SCHREMS EDWARD L.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb02326.x
Subject(s) - bond , treasury , volatility (finance) , maturity (psychological) , economics , monetary economics , bond valuation , term (time) , bond market index , financial economics , finance , psychology , developmental psychology , physics , archaeology , quantum mechanics , history
The behavior of different components of municipal bond yields may have a significant impact upon bond price behavior. Specifically, demand premiums created by banks may stabilize bond yields in some maturity ranges but not in others; for example, short‐term municipals may be stabilized but not long‐term. This research implies that bank demand behavior may create demand premiums that stabilize prices of short‐term municipal bonds relative to those of Treasury bonds of like maturity. While this implication is inconsistent with the residual theory of bank demand, it is consistent with the tax‐shield theory attributed to Hendershott and Koch [3, 4].