TITLE
"The Effect of Default Risk Insurers on Municipal Bond Yields,"Journal of Insurance Issues, C.
Steven Cole, Pu Liu, and Stanley D. Smith. March 1994, Vol. XVII,
No. 1, pp. 1-20.
ABSTRACT
Investors in tax-exempt bonds may invest in bonds that are
insured against default risk. Research in this paper explores whether it makes a
difference to investors which insurer provides the default risk protection. Using a sample
of bonds insured by each of the major insurers, evidence is presented that the insurer
significantly impacts the yields of insured municipal bonds. Based on their ratings, the
rating agencies view the major insurers as equals while investors do not. In addition, the
results may be sensitive to insurer-specific information. Previous research is limited to
the consideration of a single insurer. Results of the present study show that it may be
inappropriate to generalize to all insurers the results obtained from analyzing one
insurer. Past and future research should be evaluated in light of these results and the
insurer effect considered, where appropriate.
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