Biased Expectations and Default Risk in the Municipal Bond Market

Public mass shootings raise borrowing costs of issuers in affected counties by an average of six (five) basis points in the secondary (primary) market. This increase in tax-adjusted yield spreads is not driven by any material change in the issuers' fundamentals, nor by an increase in illiquidity, risk aversion, or excess supply of debt. In contrast, there is no evidence that the violent crime rate in the county is priced into yield spreads. A possible explanation is investors' biased expectations of fundamentals brought about by media driven salience