A NOTE ON MARKET-EFFICIENCY, INSTITUTIONAL PRACTICE, AND ECONOMIC-CONSTRAINTS IN THE EXPERIENCE OF THE CANADIAN BOND MARKET

For many years, Government of Canada bonds with high coupons traded at much higher yields than those with lower coupons. This apparent marke t inefficiency virtually disappeared over a short period of time durin g 1993. Several events occurred in 1993 which relate to the narrowing of the spread. This paper shows the earlier yield spread to be consist ent with restrictions on the trading of strip bonds. It also finds it difficult to defend the hypothesis that the higher yield spread repres ented unexploited profit opportunities.