tailieunhanh - Why fears about municipal credit are overblown

The model allows default probabilities to be forecasted for individual borrowers and to estimate correlations between those borrowers simultaneously. We show that asset and default correlations depend on the point in time calibration of the default probabilities. In addition a simultaneous estimation eases the validation of default probabilities. Thus, default probabilities and correlations should never be derived separately from each other. | HARVARD BUSINESS SCHOOL Why fears about municipal credit are overblown Daniel Bergstresser Randolph Cohen Working Paper 11-129 Copyright 2011 by Daniel Bergstresser and Randolph Cohen Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Why fears about municipal credit are overblown Daniel Bergstresser Randolph Cohen First version April 2011. Current draft June 2011. Comments welcome Abstract Highly publicized predictions of 50-100 municipal defaults have caused anxiety among municipal bond investors. While there is some chance that negative investor sentiment will lead to further spread widening the probability of the kind of widespread default that would be required to justify current municipal bond yields is low. In this paper we document the reasons why the fears of widespread municipal default during the current recession are overblown. Keywords Municipal bonds. We are grateful for support from Harvard Business School. Although both authors primary affiliations are with academic institutions both authors have at times been paid for consulting engagements in the investment management industry. Details are available upon request. Corresponding author. Harvard Business School. Tel. 617-495-6169. E-mail dbergstresser@ Massachusetts Institute of Technology. 1 Contents 1. Summary 2. Why do states and localities borrow in the United States 3. Do state balanced budget restrictions really matter 4. How indebted are states and localities today 5. What is the loss experience on municipal debt 6. What about investor flows 7. What about reduced Recovery Act funding for states and localities 8. What about the declining credit quality of financial guarantors 9. What about proposals that would allow states to file for bankruptcy protection 10. Municipal crisis case studies a. Vallejo CA

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