Current Research
Working Papers
Working Papers
The Price of Safety: The Evolution of Municipal Bond Insurance Value
(with Kimberly Cornaggia and Giang Nguyen)
May 13, 2020 draft at SSRN
Hutchins Center at Brookings Institute Working Paper
Bloomberg article: "Cities are Buying Bond Insurance That May Be Giving Them Nothing"
by Martin Braun
Abstract
We examine the benefits of bond insurance to taxpayers using comprehensive data over three decades. We employ multiple modelling approaches to account for the selection into insurance parametrically and non-parametrically. Controlling for fundamentals and the choice to insure, insurers with Aaa credit ratings provided valuable coverage in gross terms, on average, prior to 2008. After 2008, insurers were downgraded and municipalities systematically upgraded, shrinking their difference in ratings-based credit quality and thus diminishing the value of credit enhancement. However, average values belie significant heterogeneity. We find no evidence that insurance provided significant value, even in gross terms, to the highest-rated issuers even before 2008. In contrast, we find significant insurance value among lower-rated issuers over the entire period. We conclude that higher-rated communities historically subsidized those with weaker ratings. Cross-sectional results suggest that agency problems and conflicts of interest help explain this over-insurance phenomenon.
(with Kimberly Cornaggia and Giang Nguyen)
May 13, 2020 draft at SSRN
Hutchins Center at Brookings Institute Working Paper
Bloomberg article: "Cities are Buying Bond Insurance That May Be Giving Them Nothing"
by Martin Braun
Abstract
We examine the benefits of bond insurance to taxpayers using comprehensive data over three decades. We employ multiple modelling approaches to account for the selection into insurance parametrically and non-parametrically. Controlling for fundamentals and the choice to insure, insurers with Aaa credit ratings provided valuable coverage in gross terms, on average, prior to 2008. After 2008, insurers were downgraded and municipalities systematically upgraded, shrinking their difference in ratings-based credit quality and thus diminishing the value of credit enhancement. However, average values belie significant heterogeneity. We find no evidence that insurance provided significant value, even in gross terms, to the highest-rated issuers even before 2008. In contrast, we find significant insurance value among lower-rated issuers over the entire period. We conclude that higher-rated communities historically subsidized those with weaker ratings. Cross-sectional results suggest that agency problems and conflicts of interest help explain this over-insurance phenomenon.
Investor Attention and Municipal Bond Returns
(with Kimberly Cornaggia and Giang Nguyen)
June 11, 2020 draft at SSRN
Abstract
We analyze the extent to which investors in opaque markets price information from more transparent markets. Exploiting the natural experiment created by bond-insurer insolvency, we show that municipal bond investors ignore insurers’ equity prices and CDS premia, yet react to insurers’ downgrades. The severity of the investor inattention we document is relevant to the current debate over the costs and benefits of SEC proposals to improve the timeliness and quality of local government disclosure. Our secondary contribution is a straightforward method for conducting event studies in illiquid markets across several characteristics, while controlling for bond optionality and liquidity biases.
(with Kimberly Cornaggia and Giang Nguyen)
June 11, 2020 draft at SSRN
Abstract
We analyze the extent to which investors in opaque markets price information from more transparent markets. Exploiting the natural experiment created by bond-insurer insolvency, we show that municipal bond investors ignore insurers’ equity prices and CDS premia, yet react to insurers’ downgrades. The severity of the investor inattention we document is relevant to the current debate over the costs and benefits of SEC proposals to improve the timeliness and quality of local government disclosure. Our secondary contribution is a straightforward method for conducting event studies in illiquid markets across several characteristics, while controlling for bond optionality and liquidity biases.