On the Efficiency of the Bond Market: Some Canadian Evidence

Abstract

This paper proposes and tests the joint hypothesis that (1) the bond market is efficient and (2) the variation in long-term bond rates is due solely to expectations effects. Under this joint hypothesis, long-term bond rates for any fixed maturity follow (approximately) a martingale sequence. Tests with Canadian data serve not only to support the joint hypothesis but also to cast doubt upon the usefulness of the "preferred habitat" model of Modigliani-Sutch and Modigliani-Shiller as well as several single-equation macro models of interest-rate determination.