Biased Expectations and Default Risk in the Municipal Bond Market

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

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Paper Title:  Biased Expectations and Default Risk in the Municipal Bond Market

Speaker: Tarun Chordia, R. Howard Dobbs, Jr. Chaired Professor of Finance

Time and Date: 12 – 1 pm, Wednesday 5 July 2023 (AEST)

Venue: Face-to-face seminar in room CB08.08.02, Level 8, Building 8, University of Technology Sydney, 14-28 Ultimo Rd, Ultimo, Sydney, Australia (Map of campus)

Abstract and paper:  Public mass shootings raise borrowing costs of issuers in affected counties by an average of six (five) basis points in the secondary (primary) market. This increase in tax-adjusted yield spreads is not driven by any material change in the issuers' fundamentals, nor by an increase in illiquidity, risk aversion, or excess supply of debt. In contrast, there is no evidence that the violent crime rate in the county is priced into yield spreads. A possible explanation is investors' biased expectations of fundamentals brought about by media driven salience. Link to paper here. 

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