Assessing Municipal Bond Default Probabilities

Holian, Matthew and Joffe, Marc (2013): Assessing Municipal Bond Default Probabilities.

Abstract

In response to a request from the California Debt and Investment Advisory Commission, we propose a model to estimate default probabilities for bonds issued by cities. The model can be used with financial data available in Comprehensive Annual Financial Reports that cities are required to publish. The study includes modeled default probability estimates for 261 California cities with population over 25,000. Our model relies on case study evidence, logistic regression analysis of major city financial statistics from the Great Depression – the last time a large number of cities defaulted – as well as logistic regression analysis of more recent city financial statistics. Independent variables in our model include (1) the ratio of interest and pension expenses to total revenue, (2) the annual change in total revenue, (3) the ratio of general fund surplus (or deficit) to general fund revenues and (4) the ratio of general fund balance to general fund expenditures.

• Item Type: MPRA Paper
• Language: English
• Keywords: municipal bonds, municipal bankruptcy, default probability model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C35 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis > R51 - Finance in Urban and Rural Economies

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