A re-examination of the impact of credit ratings and economic factors on state bond yields |
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Authors: | Chihwa Kao Chunchi Wu |
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Affiliation: | (1) Economics Department and Finance Department, Syracuse University, 13244-2130 Syracuse, NY |
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Abstract: | In this article we re-examine the impact of credit ratings and economic factors on state bond yields using a two-step model. In the first step, we adopt an ordered probit technique to obtain consistent estimates of state bond default risk. In the second step, we estimate state bond risk premiums using a regression analysis with a categorized risk variable obtained from the first step. Similar to Terza (1987) and Hsiao (1983), the model involves a categorized ordinal explanatory (rating) variable. However, our two-step model deals with a case where category thresholds are unknown and dependent on economic factors. The model provides consistent estimates for the effects of ratings and economic factors on state bond yields. Contrary to previous findings, we find that state bond yields are mainly affected by fundamental economic variables. |
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Keywords: | municipal bond rating two-step estimates state bond yields ordered probit |
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