Asset Pricing Tests of Infrequently Traded Securities: The Case of Municipal Bonds

Yao-Tsung Chen, Chunchi Wu, Chung-Ying Yeh*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

Using a dynamic selection model, we obtain consistent and unbiased estimates of risk and returns for infrequently traded bonds and conduct the first comprehensive asset pricing test of municipal bonds using the multifactor approach. Correction for sample selection and infrequent trading problems results in substantially higher beta estimates. Besides conventional risk factors, illiquidity and taxes are important for the pricing of municipal bonds. Importantly, bond returns contain a significant liquidity risk premium. Failing to account for sample selection bias leads to erroneous inference on the magnitude of systematic risk and substantial underestimation of risk premiums.
Original languageEnglish
Pages (from-to)754-807
Number of pages54
JournalReview of Asset Pricing Studies
Volume12
Issue number3
DOIs
StatePublished - 16 Aug 2022
Externally publishedYes

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