Municipal Bond Pricing and the New York City Fiscal Crisis


  • Blount National Bank Professor of Finance, The University of Tennessee; and Assistant Professor of Finance, State University of New York at Buffalo, respectively. The authors would like to thank Michael J. Brennan and Michael H. Hopewell for their help in revising this manuscript.


This paper's findings suggests that the New York City fiscal crisis by itself did not lead to a fundamental change in risk perceptions of investors, resulting in higher interest rates in the municipal bond market. The monthly prediction errors generated by time series tests were relatively small and none were statistically significant. Only the signs on the prediction errors for June, July, and August were consistent with a New York City effect. Thus, if the New York City default had an impact on aggregate interest rates, it was at most small and of short duration.