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Systematic Pricing and Trading of Municipal Bonds

Petter N. Kolm and Sudarshan Purushothaman
The Journal of Financial Data Science Winter 2022, jfds.2021.1.079; DOI: https://doi.org/10.3905/jfds.2021.1.079
Petter N. Kolm
is clinical professor and director of the Mathematics in Finance Master’s Program at the Courant Institute of Mathematical Sciences at New York University in New York, NY
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Sudarshan Purushothaman
is partner and portfolio manager at Foundation Credit Opportunities in New York, NY
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Abstract

In this article, the authors propose a systematic approach for pricing and trading municipal bonds, leveraging the feature-rich information available at the individual bond level. Based on the proposed pricing framework, they estimate several models using ridge regression and Kalman filtering. In their empirical work, they show that the models compare favorably in pricing accuracy to those available in the literature. In addition, the models can quickly adapt to changing market conditions. Incorporating the pricing models into relative value trading strategies, the authors demonstrate that the resulting portfolios generate significant excess returns and positive alpha relative to the Vanguard Long-Term Tax-Exempt Fund, one of the largest mutual funds in the municipal space.

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The Journal of Financial Data Science: 4 (2)
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Systematic Pricing and Trading of Municipal Bonds
Petter N. Kolm, Sudarshan Purushothaman
The Journal of Financial Data Science Nov 2021, jfds.2021.1.079; DOI: 10.3905/jfds.2021.1.079

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Systematic Pricing and Trading of Municipal Bonds
Petter N. Kolm, Sudarshan Purushothaman
The Journal of Financial Data Science Nov 2021, jfds.2021.1.079; DOI: 10.3905/jfds.2021.1.079
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  • Article
    • Abstract
    • THE MUNICIPAL BOND MARKET
    • DATA AND METHODOLOGY
    • EMPIRICAL RESULTS
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • APPENDIX D
    • ENDNOTES
    • REFERENCES
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