TWO ESSAYS ON THE ROLE OF DEMAND-SIDE FACTORS IN MUNICIPAL BOND RISK PREMIA AND ENVIRONMENTAL REGULATION STRINGENCY IN THE U.S. Público

Pati, Abinash (Summer 2023)

Permanent URL: https://etd.library.emory.edu/concern/etds/vx021g622?locale=es
Published

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

 

 

 

About this Dissertation

Rights statement
  • Permission granted by the author to include this thesis or dissertation in this repository. All rights reserved by the author. Please contact the author for information regarding the reproduction and use of this thesis or dissertation.
School
Department
Subfield / Discipline
Degree
Submission
Language
  • English
Research Field
Palabra Clave
Committee Chair / Thesis Advisor
Committee Members
Última modificación

Primary PDF

Supplemental Files