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Abstract: 

This paper examines the ways in which Hurricanes Katrina, Rita, and Wilma (KRW) affected trading activity in the secondary market for municipal securities. Using MSRB data from the second half of 2005, it shows that there is little evidence of a widespread market response to these storms. The single, but important, exception to that trend was a sizable selloff of Louisiana credits and a subsequent increase in perceived liquidity risk associated with those credits. Both of these findings imply that a select group of investors responded to the threat KRW posed by selling out of their positions in municipal bonds and in doing so, paying a slightly higher trading fee. The general implication is that the municipal market was largely unaffected by KRW, but the potential may exist for a large-scale sell-off if a similarly sized natural disaster were to affect a more robust geographic segment of the municipal market.

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Affiliations:  1: University of Kansas.