Biased Expectations Theory
- Biased Expectations Theory
- A theory that the future value of interest rates is equal to the summation of market expectations. Proponents of the biased expectation theory argue that the shape of the yield curve is created by ignoring systematic factors and that the term structure of interest rates is solely derived by the market's current expectations.
Two common biased expectation theories are the liquidity preference theory and the preferred habitat theory. The liquidity preference theory suggests that long-term bonds contain a risk premium and the preferred habitat theory suggests that the supply and demand for different maturity securities are not uniform and therefore there is a difference risk premium for each security.
Investment dictionary.
Academic.
2012.
Look at other dictionaries:
Biased expectations theories — Related: pure expectations theory. The New York Times Financial Glossary … Financial and business terms
biased expectations theories — Related: pure expectations theory. Bloomberg Financial Dictionary … Financial and business terms
Pure expectations theory — A theory that asserts that the forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the markets expectations of future short term rates. For example, an increasing sloping term… … Financial and business terms
pure expectations theory — A theory that asserts that forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the market s expectations of future short term rates. For example, an increasing slope to the term… … Financial and business terms
Liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. The New York Times Financial Glossary … Financial and business terms
liquidity theory of the term structure — A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market s expectations of future interest rates because they embody a liquidity premium. Bloomberg Financial Dictionary … Financial and business terms
Market segmentation theory or preferred habitat theory — A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector. The New York Times Financial Glossary … Financial and business terms
Preferred habitat theory — A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. However, the theory rejects the assertion that the risk premium must rise uniformly with maturity … Financial and business terms
market segmentation theory or preferred habitat theory — A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector. Bloomberg Financial Dictionary … Financial and business terms
preferred habitat theory — A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. The theory rejects the assertion that the risk premium must rise uniformly with maturity, but… … Financial and business terms
