Investor Attention and Municipal Bond Returns
59 Pages Posted: 20 Sep 2017 Last revised: 10 Jun 2019
Date Written: June 7, 2019
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
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