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Non-Segmented Equilibria Under Differential Taxation: Evidence from the Canadian Government Bond Market

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  • Alexandra E. Mackay
  • Eliezer Z. Prisman
  • Yisong S. Tian

Abstract

This paper investigates tax effects in the Canadian government bond market during the period 1964—1986. Unlike previous studies, we apply both statistical and nonstatistical teststo analyze clientele effects and market equilibria. The results divide the sample into two distinct periods of time, with the end of 1976 marking the division. We find that tax effects are almost nonexistent in the Canadian government bond market before the end of 1976, but are predominant in the post-1976 period. Non-segmented market equilibria cannot be rejected before 1977, but are strongly rejected after 1976. In fact, segmented equilibria with clientele effects in both quantities and prices characterize the entire five year period from 1982 to 1986. These findings are consistent with tax reforms, government deficit financing and interest rate fluctuations in Canada during our sample period.

Suggested Citation

  • Alexandra E. Mackay & Eliezer Z. Prisman & Yisong S. Tian, 2000. "Non-Segmented Equilibria Under Differential Taxation: Evidence from the Canadian Government Bond Market," Review of Finance, European Finance Association, vol. 4(3), pages 253-278.
    • Handle: RePEc:oup:revfin:v:4:y:2000:i:3:p:253-278.
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    File URL: http://hdl.handle.net/10.1023/A:1011425214631
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    Cited by:

    1. Landon, Stuart, 2009. "The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2175-2184, December.
    2. Landon, Stuart & Smith, Constance, 2008. "Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds," MPRA Paper 9959, University Library of Munich, Germany.

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