TAX ARBITRAGE IN GOVERNMENT BONDS - A SUGGESTED METHODOLOGY WITH POLICY IMPLICATIONS

This paper develops a geometric methodology with which to analyze the no-arbitrage condition, with special reference to tax arbitrage in gov ernment bonds. Using this methodology, it is shown that a country's bo nd-issuing authority might be able to painlessly avoid market equilibr ia which is likely to induce tax arbitrage activities. The simple bond -issuing policy which will achieve this goal is identified, and its li mitations are discussed. An examination of the Canadian and Israeli bo nd markets shows that adopting the prescribed bond-issuing policy does not meaningfully impinge on the bond-issuing authority's ability to s ell bonds.