Journal article
Kimberly Cornaggia, John Hund, Giang Nguyen
Management Science, vol. 70(4), 2023, pp. 2330-2354
Management Science, vol. 70(4), 2023, pp. 2330-2354
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APA
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Cornaggia, K., Hund, J., & Nguyen, G. (2023). The Price of Safety: The Evolution of Municipal Bond Insurance Value. Management Science, 70(4), 2330–2354. https://doi.org/10.1287/mnsc.2023.4813
Chicago/Turabian
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Cornaggia, Kimberly, John Hund, and Giang Nguyen. “The Price of Safety: The Evolution of Municipal Bond Insurance Value.” Management Science 70, no. 4 (2023): 2330–2354.
MLA
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Cornaggia, Kimberly, et al. “The Price of Safety: The Evolution of Municipal Bond Insurance Value.” Management Science, vol. 70, no. 4, 2023, pp. 2330–54, doi:10.1287/mnsc.2023.4813.
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@article{kimberly2023a,
title = {The Price of Safety: The Evolution of Municipal Bond Insurance Value},
year = {2023},
issue = {4},
journal = {Management Science},
pages = {2330-2354},
volume = {70},
doi = {10.1287/mnsc.2023.4813},
author = {Cornaggia, Kimberly and Hund, John and Nguyen, Giang}
}
Abstract
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.
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.