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Bond Insurance Utilization and Yield Spreads in the Municipal Bond Market

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  • Dwight V. Denison

    (New York University)

Abstract

In recent years, commercial insurance companies insured nearly half of the annual issue of government bonds against bond default. This article illustrates that one impetus for the increasing popularity of municipal bond insurance is the segmentation of the municipal bond market into two markets: one characterized by an excess demand for low-risk credits and the other characterized by an excess supply of higher risk credits. The empirical findings indicate that the volume of insured bonds issued each quarter is influenced by the average yield spread between high- and low-risk municipal bonds and by the holdings of municipal bonds at financial institutions. On the other hand, the volume of insured municipal bonds issued in a quarter influences the average spread among high- and low-risk bonds. These findings underscore market segmentation and investors’ risk aversion as forces motivating the utilization of municipal bond insurance.

Suggested Citation

  • Dwight V. Denison, 2001. "Bond Insurance Utilization and Yield Spreads in the Municipal Bond Market," Public Finance Review, , vol. 29(5), pages 394-411, September.
    • Handle: RePEc:sae:pubfin:v:29:y:2001:i:5:p:394-411
    DOI: 10.1177/109114210102900503
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    References listed on IDEAS

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    1. Brick, John R & Thompson, Howard E, 1978. "Time Series Analysis of Interest Rates: Some Additional Evidence," Journal of Finance, American Finance Association, vol. 33(1), pages 93-103, March.
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    3. Kidwell, David S. & Sorensen, Eric H. & Wachowicz, John M., 1987. "Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 299-313, September.
    4. Richard B. Harper & Stephen D. Smith, 1993. "Private insurance of public debt: another look at the costs and benefits of municipal insurance," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 27-38.
    5. L Paul Hsueh & P. R. Chandy, 1989. "An Examination Of The Yield Spread Between Insured And Uninsured Debt," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 235-244, September.
    6. Marquette, R. Penny & Wilson, Earl R., 1992. "The case for mandatory municipal disclosure: Do seasoned municipal bond yields impound publicly available information?," Journal of Accounting and Public Policy, Elsevier, vol. 11(3), pages 181-206.
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    Cited by:

    1. Racheva-Sarabian, Anna & Ryvkin, Dmitry & Semykina, Anastasia, 2015. "The default of special district financing: Evidence from California," Journal of Housing Economics, Elsevier, vol. 27(C), pages 37-48.
    2. repec:eme:qrfmpp:v:3:y:2011:i:2:p:68-83 is not listed on IDEAS

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