NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Stock Market Yields and the Pricing of Municipal Bonds

N. Gregory Mankiw, James M. Poterba

NBER Working Paper No. 5607
Issued in June 1996
NBER Program(s):   AP   EFG   ME   PE

This paper proposes an alternative to the traditional model for explaining the spread between taxable and tax-exempt bond yields. This alternative model is a special case of a general class of clientele models of portfolio choice and asset market equilibrium. In particular, we consider a setting with two types of investors, a taxable investor and a tax-exempt investor, who hold specialized bond portfolios. The tax-exempt investor holds only taxable bonds, and the taxable investor holds only tax-exempt bonds. Both investors hold equity, and the taxable and tax-exempt bond markets are linked through the equilibrium conditions governing equity holding and bond holding for each type of investor. In contrast to the traditional model, this alternative model has the potential to explain the small observed spread between taxable and tax-exempt yields. In addition, this model predicts that the yield spread between taxable and tax-exempt bonds should be an increasing function of the dividend yield on corporate stocks. Although the substantial changes in the tax code during the last four decades complicate the testing of this model, we find some support for the predicted relationship between the equity dividend yield and the yield spread between taxable and tax-exempt bonds.

download in pdf format
   (781 K)

email paper

This paper is available as PDF (781 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5607

Users who downloaded this paper also downloaded these:
Erickson, Goolsbee, and Maydew w9105 How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds
Poterba Explaining the Yield Spread between Taxable and Tax-exempt Bonds : The Role of Expected Tax Policy
Poterba and Rueben State Fiscal Institutions and the U.S. Municipal Bond Market
Feenberg and Poterba w3900 Which Households Own Municipal Bonds? Evidence From Tax Returns
Poterba and Rueben w6237 State Fiscal Institutions and the U.S. Municipal Bond Market
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us