Did Bond Fund Investors Anticipate the Financial Crisis of Orange County?
Author: Dwight V. Denison.
Source: Volume 21, Number 03, Fall 2000 , pp.24-39(16)
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Abstract:
It is hard to argue against more information when concerned about promoting otherwise inefficient markets. After all, how many municipal bond market investors could possibly have anticipated the problems of Orange County? The answer to this question, according to Dwight Dennison, appears to be ‘plenty.’ In this article, Dennison explores the market anticipation of, and reaction to, the Orange County Crisis. Dennison finds evidence not only that investors in the California municipal bond market moved toward insured bond funds, but that they did so before the announced losses in the investment pool! This is an exciting and controversial finding, not only in light of the subsequent shift of the costly research burden from investors to issuers, but because it provides evidence that the municipal bond market possesses strong-market attributes previously attributed solely to the world of corporate obligations. Dennison’s work highlights the importance of municipal bond insurance for government issuers who frequently find their bonds in the hands of very narrowly defined mutual funds.Keywords: Orange County (CA) Chapter 9 bankruptcy; information and pricing; standardized average price (SAP); secondary municipal bond market; market efficiency
Affiliations:
1: New York University.