Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244558 
Year of Publication: 
2019
Series/Report no.: 
Working Paper No. 12/2019
Publisher: 
Örebro University School of Business, Örebro
Abstract: 
The purpose of this paper is to investigate if credit markets believe in the existence of a central government guarantee and if this can be observed in the yield spread of the municipal sector. This is done by decomposing the municipal bond yield spread into liquidity and credit risk premiums by variance decomposition in a vector autoregressive setting – an approach which, to our knowledge, has not been previously suggested. Our results show that 62% or 50 basis points of the yield spread is explained by the chosen liquidity and credit variables. The liquidity risk premium makes up 35% or 28 basis points of the yield spread and credit makes up 27% or 22 basis points. Thus, investors and creditors in general do not believe in the existence of such a guarantee.
Subjects: 
Municipality bonds
risk premium
credit risk
liquidity risk
yield spread
JEL: 
G12
G23
H74
Document Type: 
Working Paper

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