Municipal bonds and tax arbitrage: A cointegration analysis
Abbreviated Journal Title
Public Financ. Rev.
UNIT-ROOT; TIME-SERIES; HYPOTHESIS; MODELS; YIELDS; TESTS; VECTORS; MARKET; Business, Finance
This article presents a new cointegration approach to test a tax arbitrage opportunity in holding municipal bonds. Noticing that the variables of interest are nonstationary, two alternative cointegration tests are used to examine the relationship that may exist (1) between the yield on municipal bonds and the after-raw yield on corporate bonds and (2) between the explicit mu rate on corporate bonds and the implicit tar rate on municipal bonds. Previous studies do not rake into account the time-series properties of the variables involved, assuming tacitly that they are stationary. Weekly bond yield data together with New Jersey and federal income tar rates are used, and various unit root and cointegration tests are employed to test for stationarity and for cointegration between the variables. The evidence fails to support the tar arbitrage hypothesis.
Public Finance Review
"Municipal bonds and tax arbitrage: A cointegration analysis" (2000). Faculty Bibliography 2000s. 2644.