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Bond Insurance and Liquidity Provision: Impacts in the Municipal Variable Rate Debt Market, 2008-09

Author

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  • Christine R. Martell

    (School of Public Affairs, University of Colorado Denver, Denver, CO, USA, Christine.Martell@ucdenver.edu)

  • Robert S. Kravchuk

    (Department of Political Science, University of North Carolina at Charlotte, Charlotte, NC, USA)

Abstract

This article explores the effects of credit enhancement, and downgrades to credit enhancement providers, on the costs to municipal issuers for holding variable rate debt during the 2008—09 market crisis. Although municipal issuers were potentially subject to pressure on their debt issues due to credit contraction, the extent of the problem has not been well researched, especially regarding credit enhancement. This study empirically investigates whether liquidity providers affect the cost of municipal variable rate debt and whether the impact is affected by credit downgrades of liquidity providers. Several important contributions are made. First, this research emphasizes the role of liquidity provision as a form of credit enhancement. Second, the value of liquidity provision is examined in the environment of credit downgrades to liquidity providers. Third, the research tests capital market efficiency using variable, as opposed to fixed rate debt, which allows for the identification of liquidity risk and default risk.

Suggested Citation

  • Christine R. Martell & Robert S. Kravchuk, 2010. "Bond Insurance and Liquidity Provision: Impacts in the Municipal Variable Rate Debt Market, 2008-09," Public Finance Review, , vol. 38(3), pages 378-401, May.
    • Handle: RePEc:sae:pubfin:v:38:y:2010:i:3:p:378-401
    DOI: 10.1177/1091142110368048
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    References listed on IDEAS

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    1. Robert L. Bland, 1987. "The interest cost savings from municipal bond insurance: The implications for privatization," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(2), pages 207-219.
    2. 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.
    3. Timothy Q. Cook, 1982. "Determinants of individual tax-exempt bond yields : a survey of the evidence," Economic Review, Federal Reserve Bank of Richmond, vol. 68(May), pages 14-39.
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    5. Arceneaux, Kevin & Nickerson, David W., 2009. "Modeling Certainty with Clustered Data: A Comparison of Methods," Political Analysis, Cambridge University Press, vol. 17(2), pages 177-190, April.
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    7. Gore, Angela K & Sachs, Kevin & Trzcinka, Charles, 2004. "Financial Disclosure and Bond Insurance," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 275-306, April.
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    Cited by:

    1. Kenneth A. Kriz & Yan Xiao, 2017. "The Impact of Rating Recalibration on Municipal Bond Yield Spreads," Public Budgeting & Finance, Wiley Blackwell, vol. 37(2), pages 83-101, June.

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