The pure expectations (market expectations) hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on [...].
Answer
market participants' expectations of future interest rates
Tags
#finance #yield-curve
Question
The pure expectations (market expectations) hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on [...].
Answer
?
Tags
#finance #yield-curve
Question
The pure expectations (market expectations) hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on [...].
Answer
market participants' expectations of future interest rates
If you want to change selection, open original toplevel document below and click on "Move attachment"
Parent (intermediate) annotation
Open it The pure expectations (market expectations) hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on market participants' expectations of future interest rates.
Original toplevel document
Yield curve - Wikipedia, the free encyclopedia g in a credit bubble.
Theory[edit]
There are three main economic theories attempting to explain how yields vary with maturity. Two of the theories are extreme positions, while the third attempts to find a middle ground between the former two.
<span>Market expectations (pure expectations) hypothesis[edit]
Main article: expectation hypothesis
This hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on market participants' expectations of future interest rates. Using this, future rates, along with the assumption that arbitrage opportunities will be minimal in future markets, and that future rates are unbiased estimates of forthcoming spot rates, is enough information to construct a complete expected yield curve. For example, if investors have an expectation of what 1-year interest rates will be next year, the 2-year interest rate can be calculated as the compounding of this year's interest rate by next year's interest rate. More generally, rates on a long-term instrument are equal to the geometric mean of the yield on a series of short-term instruments. This theory perfectly explains the observation that yields usually move together. However, it fails to explain the persistence in the shape of the yield curve.
Shortcomings of expectations theory: Neglects the risks inherent in investing in bonds (because forward rates are not perfect predictors of future rates). 1) Interest rate risk 2) Reinvestment rate risk
Liquidity premium theory[edit]
The Liquidity Premium Theory is an offshoot of the Pure Expectations Theory. The Liquidity Premium Theory asserts that long-term interest rates not only re
Summary
status
not learned
measured difficulty
37% [default]
last interval [days]
repetition number in this series
0
memorised on
scheduled repetition
scheduled repetition interval
last repetition or drill
Details
No repetitions
Discussion
Do you want to join discussion? Click here to log in or create user.