Municipal bonds and tax arbitrage: A cointegration analysis

    Authors

    H. Y. Kim; J. Lee; S. E. Lile;J. R. Ramsey

    Abbreviated Journal Title

    Public Financ. Rev.

    Keywords

    UNIT-ROOT; TIME-SERIES; HYPOTHESIS; MODELS; YIELDS; TESTS; VECTORS; MARKET; Business, Finance

    Abstract

    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.

    Journal Title

    Public Finance Review

    Volume

    28

    Issue/Number

    4

    Publication Date

    1-1-2000

    Document Type

    Article

    Language

    English

    First Page

    372

    Last Page

    389

    WOS Identifier

    WOS:000087985800005

    ISSN

    0048-5853

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