RT Journal Article
SR Electronic
T1 Counterparty Credit Risk in the Municipal Bond Market
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 7
OP 33
DO 10.3905/jfi.2015.25.1.007
VO 25
IS 1
A1 San-Lin Chung
A1 Chen-Wei Kao
A1 Chunchi Wu
A1 Chung-Ying Yeh
YR 2015
UL https://pm-research.com/content/25/1/7.abstract
AB A large number of municipal bonds are guaranteed by monoline insurers who are at the center of the subprime crisis. This article investigates the effect of insurer-related counterparty risk on municipal bond pricing using a comprehensive dataset. The authors estimate both insurer-specific and systemic components of a counterparty risk effect. Results show that the magnitude of the counterparty risk effect is of economic significance even in normal times and is magnified during the crisis. The findings also indicate that this effect is much larger than that documented for the credit default swap and repo markets. The counterparty risk premium is higher for speculative-grade and illiquid bonds and for bonds issued by troubled states.TOPICS: Fixed income and structured finance, counterparty risk, credit risk management