Biased Expectations Theory

外汇网2021-06-19 20:53:10 64

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 pference theory and the pferred habitat theory. The liquidity pference theory suggests that long-term bonds contain a risk pmium and the pferred habitat theory suggests that the supply and demand for different maturity securities are not uniform and therefore there is a difference risk pmium for each security.

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