Systematic Correlations and Municipal Bond Yields

Abstract

This study analyzes the impact of a local state’s systematic risk exposure on tax-adjusted municipal bond yields in the United States. We generate a proxy for the area’s systematic exposure, which we refer to as the state beta, and examine its effect on yields with various controls for corporate bond factors, remaining maturities, states, and macroeconomic conditions. We find that the state beta demonstrates a statistically significant effect on yield primarily in medium to long remaining maturity bonds. However, we find evidence that the systematic exposure of the state is likely non-time varying as seen by a reduced effect after controlling for state-fixed effects.