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How attractive are municipal bonds for the passive competitiveness: the case of immunization of municipal bonds

Darko B. Vukovic (Department of Finance and Credit, Faculty of Economics, Peoples’ Friendship University of Russia, Moscow, Russia and Department of Finance, Higher School of Economics, National Research University, Saint Petersburg, Russia)
Moinak Maiti (Department of Finance, Higher School of Economics, National Research University, Saint Petersburg, Russia)
Dmitry Kochetkov (School of Finance, Higher School of Economics, National Research University, Moscow, Russia)
Alexander Bystryakov (Department of Finance and Credit, Faculty of Economics, Peoples’ Friendship University of Russia, Moscow, Russia)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 6 May 2020

Issue publication date: 22 July 2021

598

Abstract

Purpose

This paper study regional attractiveness through passive portfolio investment based on duration, immunization and convexity (in case of higher interest rate volatility) of municipal bonds by using data from Standard and Poor’s. The massive variety of financial incentives to promote regional investment attractiveness is dependent on governmental strategy. Municipal bonds are the one of the most efficient ways of direct investments in the region, however, it is still a question of a good balance between a certain rate of return and an adequate risk. The purpose of this paper is to analyze the investment opportunities in municipal revenue bonds.

Design/methodology/approach

This study developed a model of investing using municipal bonds with the case of their immunization and analyze attractiveness of such investment. The theoretical model assumes a situation where the local government finances its capital projects through municipal revenue bonds. Such situations influence strongly on regional or local competitiveness provided by local government policy.

Findings

An analysis of the municipal bond market indicates that both municipal general and revenue bonds had stable and good level of yields to maturity in the past ten years. Their standard deviations were very low and in the past two years almost approached the level of standard deviations of treasury bonds. With the duration of 4–6 years on 5-year investment in municipal revenue bonds and their immunization, it is possible to provide good returns for investor.

Research limitations/implications

The limitation of this study concerns theoretical situation where local government will use non-market-based policy to reduce the interest rates and that will influence on rise of municipal bond liquidity premium (price distortion). This situation will make municipality bonds less attractive for investing, especially because of lower liquidity on secondary market. Also, this model is applicable in regions that have developed financial markets.

Practical implications

This research suggests governments a sustainable framework to use municipal bonds as a strategy for capital targeting in regions.

Social implications

This research is related to professional investors’ strategy with projects that have the highest investment potential; this is good way for an adequate allocation of resources (regional competitiveness).

Originality/value

This paper analyzes very rare subject involving local government strategy of finance and portfolio investment in municipal bonds. There is a huge gap in the literature on this issue. Also, this study provides the model that can be used as a case for higher local competitiveness.

Keywords

Acknowledgements

Conflict of interest: all authors declare that they have no conflict of interest.

Ethical approval: this article does not contain any studies with human participants or animals performed by any of the authors.

The authors are supported by Russian Foundation for Basic Research for funding project 18-00-01040 KOMFI “The Impact of Emerging Technologies on Urban Environment and the Quality of Life of Urban Communities.” The authors, Darko Vukovic and Alexander Bystryakov, are supported by RUDN University in Program 5-100 in Russian Federation.

Citation

Vukovic, D.B., Maiti, M., Kochetkov, D. and Bystryakov, A. (2021), "How attractive are municipal bonds for the passive competitiveness: the case of immunization of municipal bonds", Competitiveness Review, Vol. 31 No. 5, pp. 793-809. https://doi.org/10.1108/CR-02-2020-0024

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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