The Price of Safety: The Evolution of Insurance Value in Municipal Markets

Cornaggia, Kimberly Rodgers; Hund, John; Nguyen, Giang

doi:10.2139/ssrn.3266890

Cited by 10 publications

(10 citation statements)

References 48 publications

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“…Using our predicted yields for uninsured bonds, we compute the gross insurance benefit and show that it has declined significantly since 2000 and, in fact, fell below zero between 2011 and 2013. 4 That the insurance benefit is plausibly negative in some years suggests that issuers could have done better by not insuring their bonds at all, consistent with recent evidence from Cornaggia, Hund, and Nguyen (2019) who take a complementary approach and find similar results about "over insurance" leading up to the crisis.…”

Section: Introductionmentioning

confidence: 55%

The Declining Insurance Benefit in the Municipal Bond Market

Bronshtein¹,

Makridis²

2020

National Tax Journal

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Second, we examine five plausible explanations for this decline: (1) changes in bond maturities, (2) issuance size value, (3) issuer's credit risk, (4) insurer's financial strength, and ( 5) the interest rate environment. The main reason is the decline in insurer's financial strength. Third, the decline in the insurance benefit explains 34 percent of the decline in the aggregate municipal bond issuance. Our results are consistent with recent models of coordination failure and imperfect information, especially during crisis years.

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Section: Introductionmentioning

confidence: 55%

The Declining Insurance Benefit in the Municipal Bond Market

Bronshtein¹,

Makridis²

2020

National Tax Journal

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“…The fraction of insured bonds peaked in 2005 at 57.3%, but then fell to 5.5% in 2011 following the collapse of bond insurers in the 2008 financial crisis (Lai and Zhang 2013). Municipal bond insurance became popular again after 2013: by 2016, 20% of GO bonds issued were insured (Cornaggia, Hund, and Nguyen 2019). In our sample, 56% of the bonds are insured overall, but in 2009 or later, this share averages only 19%.…”

Section: Insured Municipal Bondsmentioning

confidence: 66%

Natural Disasters and Municipal Bonds

Auh¹,

Choi²,

Deryugina³

et al. 2022

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Climate change is increasing the frequency of natural disasters, which could make municipal bonds a riskier asset class. We study the effects of natural disasters on municipal bond returns, exploiting the repeat sales approach to overcome the challenge that municipal bonds trade extremely infrequently. We find substantial price effects that materialize gradually: returns of uninsured bonds fall slowly in the weeks following a disaster, by 0.31% on average, translating into investor losses of almost $10 billion. Source of bond revenue, bond insurance, disaster severity, federal disaster aid, and local financial conditions all affect the magnitude of the price effects.

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“…Earlier research addresses the issue of choice into intermediation through two-stage regressions (e.g., Liu, 2018) or propensity score matching algorithms (e.g., Cornaggia et al, 2021). Both approaches attempt to completely model and thus control for the selection.…”

Section: Robustness Checksmentioning

confidence: 99%

Municipal bond sectoral risk and information intermediation in uncertain times: Evidence from the Covid‐19 pandemic

Yang

Winecoff

2022

Public Budgeting & Finance

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The municipal bond market is not homogeneous but consists of varying credits supporting different governmental activities. In this paper we discuss how sectors form and how they are differentially subject to market risks, using the Covid-19 pandemic as a case study. The pandemic has disrupted all financial markets, particularly some municipal bond sectors supported by nongeneral obligation credits, such as health care, arts, and transportation. By comparing the sectors that face a greater increase in risk with others, we empirically examine the market uncertainty hypothesis that intermediation provides stronger certification value when sectoral risk increases. We find an increased use of insurance among high-risk-elevation bonds. Bond insurance, nevertheless, is not associated with larger reductions in offering yields in the high-risk-elevation sectors on average, but only for issuers consistently insuring all issuances. The yield difference between unrated and rated bonds expands more in the high-risk-elevation sectors; for an average unrated bond in such sectors, receiving any investmentgrade rating is associated with yield reductions.

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The Price of Safety: The Evolution of Insurance Value in Municipal Markets

Cited by 10 publications

References 48 publications

The Declining Insurance Benefit in the Municipal Bond Market

The Declining Insurance Benefit in the Municipal Bond Market

Natural Disasters and Municipal Bonds

Municipal bond sectoral risk and information intermediation in uncertain times: Evidence from the Covid‐19 pandemic

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