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

58 Pages Posted: 19 Oct 2018 Last revised: 9 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 5, 2019

Abstract

We examine the benefits of bond insurance to taxpayers using comprehensive data and selection models to control for fundamentals and the endogenous choice to insure. Prior to 2008, when insurance provided AAA coverage, insurance saves issuers 9 bps, on average. Because the monolines were downgraded in 2008-2009 and because general obligation bonds were upgraded due to Moody's scale recalibration in 2010, the distance between the credit quality of the insured issuers and of the available insurance shrinks from both sides. Since 2008, insurance is associated with offering yields 4 bps higher than otherwise similar uninsured issuers; only the lowest-rated issuers obtain gross benefit. Although prior evidence from secondary markets suggests that insurance generally provides value to investors, our results from primary markets indicate that insurance generally provides no value to taxpayers who pay the premiums.

Keywords: bond insurance, municipal bonds, yield inversion, municipal market liquidity, propensity score matching IPWRA

JEL Classification: G01, G12, G22, H74

Suggested Citation

Cornaggia, Kimberly Rodgers and Hund, John and Nguyen, Giang, The Price of Safety: The Evolution of Insurance Value in Municipal Markets (June 5, 2019). Available at SSRN: https://ssrn.com/abstract=3266890 or http://dx.doi.org/10.2139/ssrn.3266890

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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