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The Impact of Default Risk Insurer’s Financial Distress on Insured Municipal Bonds

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  • Chris Brune
  • Pu Liu

Abstract

A key element in the effectiveness of municipal bond insurance is the financial stability of the insurer. This paper examines the impact on insured municipal bonds of a decline in the financial strength of an insurer. Results show that risk premiums increase after the financial stability of the insurer weakens. The effect is most pronounced for revenue bonds with low underlying ratings. Interestingly, bonds insured by companies other than the one whose stability was diluted are also affected. The results thus show a contagion effect in the insured municipal bond market.

Suggested Citation

  • Chris Brune & Pu Liu, 2011. "The Impact of Default Risk Insurer’s Financial Distress on Insured Municipal Bonds," Municipal Finance Journal, University of Chicago Press, vol. 32(3), pages 19-36.
    • Handle: RePEc:ucp:munifj:doi:10.1086/mfj32030019
    DOI: 10.1086/MFJ32030019
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