The Price of Safety: The Evolution of Municipal Bond Insurance Value

Economic theory predicts that bond insurance lowers issuers’ financing costs by resolving asymmetric information and mitigating credit risk. With comprehensive data over the last 36 years, we find increasingly diminished empirical support for these models. The value of insurance in resolving asymmetric information beyond that resolved by credit ratings and other observable bond characteristics is economically minimal. The average gross value of insurance ranges from 4 to 14 bps when bond insurers offer Aaa-rated coverage. However, this gross value becomes insignificant after 2008 when Aaa-rated insurance no longer exists. Evidence suggests that the lack of insurance benefit in the postcrisis period is attributable to the deteriorated creditworthiness of insurance companies. Examining noninterest saving explanations for the continued use of insurance in the no-Aaa insurance market, we find evidence that issuers purchase insurance out of habit (with insurance value most diminished for habitual purchasers with low governance quality) and for the convenience it affords in default, but no evidence that insurance improves secondary market liquidity.

The final published version can be found at https://doi.org/10.1287/MNSC.2023.4813

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Work Title The Price of Safety: The Evolution of Municipal Bond Insurance Value
Access
Open Access
Creators
  1. Kimberly Cornaggia
  2. John Hund
  3. Giang Nguyen
Keyword
  1. municipal markets
  2. financial guaranty
  3. insurance value
  4. asymmetric information
License In Copyright (Rights Reserved)
Work Type Article
Publisher
  1. Management Science
Publication Date May 14, 2023
Publisher Identifier (DOI)
  1. https://doi.org/10.1287/MNSC.2023.4813
Deposited August 14, 2024

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Version 1
published

  • Created
  • Added YIeldPaper_MS_Final.pdf
  • Added Creator Kimberly Cornaggia
  • Added Creator John Hund
  • Added Creator Giang Nguyen
  • Published
  • Updated
  • Updated Keyword, Publication Date Show Changes
    Keyword
    • municipal markets, financial guaranty, insurance value, asymmetric information
    Publication Date
    • 2024-01-01
    • 2023-05-14