Research

Do Tax-Exempt Yields Adjust Slowly to Substantial Changes in Taxable Yields?

This paper examines the profitability of two futures trading strategies: a municipal bond futures contract strategy and a spread strategy consisting of a municipal bond futures contract and a Treasury bond futures contract. Both strategies are designed to exploit a slow municipal yield adjustment following changes in Treasury yields. We find economically significant profits to both strategies. Average holding period returns per trade for both strategies tend to increase with the magnitude of the Treasury yield change. Profit distributions associated with various Treasury yield change thresholds tend to be positively skewed, and median profits are significantly lower than average profits. The profitability results are consistent with slow municipal yield adjustments.

Publication Information
Article Title: Do Tax-Exempt Yields Adjust Slowly to Substantial Changes in Taxable Yields?
Journal: Journal of Futures Markets (Aug, 2008)
Author(s): Dudney, Donna;  Geppert, John
Researcher Information
    
Dudney, Donna
Dudney, Donna
Associate Dean of Undergraduate Curriculum and Programs
Expertise:
  • Financial Institutions
  • Financial Markets & Investing
  • Managerial Economics
Finance
CoB 301 G
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-5695
Fax: (402) 472-5180
ddudney@unl.edu
Geppert, John
Geppert, John
Professor
Expertise:
  • Financial Markets & Investing
Finance
CoB 425 P
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-3370
Fax: (402) 472-5140
jgeppert1@unl.edu