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Decomposing Japanese municipal bond spreads: Default and liquidity premiums in times of crisis

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  • Hattori, Takahiro

Abstract

This paper examines the Japanese municipal bond market to decompose the spread into default and liquidity risk components. The distinction between these two risk components is more readily identified in the Japanese context than in the well-studied US context because municipal bonds in Japan are not subject to preferential tax treatment as they are in the US. Daily data are used to analyze spreads for the bonds of three prefectures (Tokyo, Aichi, and Osaka) during periods that capture the Yūbari crisis of 2006 and the global financial crisis of 2008 (sample periods extending from 2005 to 2014). Kalman filter methods of estimation are used. We find that contrary to popular opinion, the widening of spreads during the Yūbari crisis was not due to an increase in the default premium but rather to a lack of market liquidity. By contrast, the much greater widening of spreads during the global financial crisis can be traced to a sharp increase in the default premium.

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  • Hattori, Takahiro, 2018. "Decomposing Japanese municipal bond spreads: Default and liquidity premiums in times of crisis," Journal of Asian Economics, Elsevier, vol. 59(C), pages 16-28.
    • Handle: RePEc:eee:asieco:v:59:y:2018:i:c:p:16-28
    DOI: 10.1016/j.asieco.2018.09.002
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    More about this item

    Keywords

    Municipal bonds; Public finance; Default risk; Liquidity premium; Yūbari crisis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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