Investor Attention and Municipal Bond Returns

59 Pages Posted: 20 Sep 2017 Last revised: 10 Jun 2019

See all articles by Kimberly Rodgers Cornaggia

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

John Hund

University of Georgia

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Date Written: June 7, 2019

Abstract

We adapt a novel empirical methodology to analyze the informational efficiency of the municipal bond market and find robust evidence that muni investors ignore for months the steep deterioration in the equity market capitalization (and spikes in CDS prices) of the companies insuring their investments. However, investors devalue their coverage significantly after insurers lose their Aaa certification from credit rating agencies. Institutional investors respond to information faster than retail investors, but still with significant delay. We conclude that municipal bond investors care more about the Aaa rating than they care about credit enhancement and that this market remains highly segmented.

Keywords: Market segmentation, market efficiency, municipal bonds, bond return indices, bond insurance, investor attention

JEL Classification: G01, G12, G14, G24

Suggested Citation

Cornaggia, Kimberly Rodgers and Hund, John and Nguyen, Giang, Investor Attention and Municipal Bond Returns (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3039098 or http://dx.doi.org/10.2139/ssrn.3039098

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

John Hund

University of Georgia ( email )

Athens, GA 30602
United States

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

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