A Certainty Eqivalent Approach to Municipal Bond Default Risk Estimation

Publication Type

Journal Article

Publication Date

1991

Abstract

This paper extends the risk-neutrality default model of municipal bonds to consider the effect of risk aversion on the estimation of default probability. A model is proposed to separate the default risk assessment from the investor's risk aversion. Empirical results show that the risk-neutrality model consistently overestimates the default probability but that the magnitude of this overestimate is generally small and statistically insignificant.

Discipline

Business

Research Areas

Finance

Publication

Journal of Financial Research

Volume

3

Issue

3

First Page

241

Last Page

247

ISSN

0270-2592

Publisher

Wiley

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