Municipal Bond Demand Premiums and Bond Price Volatility: A Note

  • Author(s): DUANE STOCK, EDWARD L. SCHREMS
  • Published: Apr 30, 2012
  • Pages: 535-539
  • DOI: 10.1111/j.1540-6261.1984.tb02326.x

ABSTRACT

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].

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