TWO ESSAYS ON THE ROLE OF DEMAND-SIDE FACTORS IN MUNICIPAL BOND RISK PREMIA AND ENVIRONMENTAL REGULATION STRINGENCY IN THE U.S. Open Access
Pati, Abinash (Summer 2023)
Abstract
The dissertation consists of two essays on demand-side factors, showing why and how considering demand-side factors is important in answering fundamental asset pricing questions, as well as understanding the breadth of factors that explain environmental regulation stringency in the US.
The first essay (Heterogeneous Investors and Risk Premiums in the Municipal Bond Market) studies how asset prices vary with the risk exposures of heterogeneous financial intermediaries in the municipal bond market. Banks with local bank branches, as marginal investors, price their interest rate risk exposure into offering yield spreads of bank-qualified bonds. The pricing of interest rate risk exhibits strong intertemporal heterogeneity, varying with the level of the federal funds rate. Banks with higher deposit market power charge lower risk premiums for bearing interest rate risk. Apart from banks, mutual funds provide liquidity services while investing in illiquid assets like municipal bonds. Funds with higher cash holdings, indicative of greater liquidity management needs, pay lower prices for more illiquid municipal bonds. The results highlight that in segmented markets, the risk exposures of heterogeneous intermediaries who are the marginal investors determine asset prices. The cost of financing for issuers has direct consequences for real investment and local infrastructure.
The second essay (Heterogeneity in Enforcement Stringency and Environmental Pollution in the U.S.) examines the relationship between local housing wealth and the stringency of environmental regulation enforcement in the United States. Using county-level variation in median home values driven by exogenous housing supply elasticity and mortgage rate shocks, the analysis shows that increases in local housing wealth lead regulators to significantly strengthen enforcement of clean air standards under the Clean Air Act. The effect is stronger in counties with higher social capital and in states with Democratic governors. Heightened enforcement compels local polluting plants to reduce future toxic releases by 3-6% and increase investments in abatement technologies like recycling. The findings highlight that decentralized environmental policy enforcement can become fragmented when local communities differ in their willingness to pay for environmental quality.
Table of Contents
Essay 1: Heterogeneous Investors and Risk Premiums in the Municipal Bond Market
Contents
1. Introduction 2
2. Related Literature 9
3. Data and Summary Statistics 11
A. Bank Variables 11
A.1 Income Gap 11
A.2 Other Bank Variables 13
B. Municipal Bonds 14
B.1 Institutional Details of Bank-Qualified Bonds 16
C. Bond Fund Holdings 17
D. Other Variables 18
4. Empirical Methods and Results 19
A. Banks’ Exposure to Interest Rate Risk and Offering Yields of Newly Issued Bank-Qualified Bonds 19
B. Inter-temporal Heterogeneity in Interest Rate Risk Pricing 25
C. The Role of Banks’ (Deposit) Market Power 29
D. Additional Findings 30
D.1 The Role of the Underwriter 31
D.2 Ruling out Local Households as Marginal Investors in BQ Bonds 32
D.3 Effects on the Extensive Margin 33
5. Do Banks Price their Liquidity Risk Exposure? 34
6. Municipal Bond Mutual Funds and the Price of Liquidity Risk 35
A. Main Results 36
B. Instrumental Variable Approach 38
7. Conclusion 40
8. References 41
Essay 2: Heterogeneity in Enforcement Stringency and Environmental Pollution in the U.S
Contents
1. Introduction 84
2. Enforcement of Environmental Regulation in the US 92
3. Data 94
A. Enforcement and Pollution Data 94
B. County Variables 97
C. Graphical Analysis & Summary Statistics 99
4. Empirical Analysis 100
A. The Effect of County-Level Median Housing Wealth on Local Enforcement Outcomes 100
B. Real Effects on Local Polluting Plants’ Environmental Profile 106
C. Effect on Plant-level Abatement & Waste Generation Activities 110
5. Discussion of Results and Prospects for Future Research 114
6. Conclusion 115
7. References 116
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TWO ESSAYS ON THE ROLE OF DEMAND-SIDE FACTORS IN MUNICIPAL BOND RISK PREMIA AND ENVIRONMENTAL REGULATION STRINGENCY IN THE U.S. () | 2023-08-02 13:18:55 -0400 |
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