An Empirical Analysis of the Municipal Bond Market in Italy: Sovereign Risk and Sub‐Sovereign Levels of Government

Abstract

This study empirically investigates the factors affecting municipal bond yields in the Italian market, a market characterized by several tiers of sub‐sovereign issuers and by a non‐negligible sovereign risk. Economic, financial and fiscal data from regions, provinces and cities are used to assess how a municipality's credit quality affects its borrowing costs. The results suggest that investors apply different pricing schemes to different types of local governments. Whereas the default risk of regions matters, the creditworthiness of cities and provinces is irrelevant, with sovereign risk and interest rate risk alone able to largely explain the variance in yields.

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