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Diversification Gains in the Market for Provincial Bonds

What are the potential benefits from investing in bonds issued by a province when holding an efficient portfolio of bonds issued by the remaining nine ones? How beneficial is the exposure to additional provincial bond markets from the perspective of investors whose core interests reside in maximizing the return to risk bearing? This paper addresses these and similar questions by evaluating the gains from portfolio diversification in the market for bonds issued by the Canadian provinces. Our findings indicate that market participants are unlikely to benefit from portfolio diversification. In particular, once realistic trading restrictions are taken into account, the benefits from the exposure to multiple provincial bond markets can be exhausted by investing in bonds issued by one province.