What is the hypothesis of expectations?

The hypothesis of expectation is the theory of how markets determine long -term interest rates on debt -based assets. The theory is simply that rates are decided by short -term expectations plus a fixed additional amount that reflects a natural increased risk in the long run. Most of the hypothesis tests do not come out, but the reasons are questioned. These are interest rates that investors receive by purchasing an asset. On the other hand, there are also interest rates that the original asset issuer, such as corporation or government, must pay in this way. Generally short -term and long -term rates for specific assets or different forms of the same assets as an annual bond and three -year bond are already known. This means that we can immediately find out whether the hypothesis is correct.

The exact formula used in the hypothesis of expectation varies from case to case. There is a consistent principle, which is that shortSaccare and long -term rates will vary according to the fixed level. The logic is that all factors that affect the short -term rate relate to a long -term rate, but that the long -term rate also includes "bonuses" to cover uncertainty, such as a long period during which the issuer can start.

How many studies show that the hypothesis of expectation is not a reality, its main function is like the starting point for an economic puzzle. Economists believe to think why the hypothesis does not judge, can help explain more about how markets actually work. One theory is that while the basic thinking hypothesis of expectation is valid, T "Premium" is not consistent and instead changes over time, perhaps with different rates. Another theory is that the hypothesis falsely assumes that short -term rates can accurately predict when there are too many variable factors.

There are some studies that indicate that the hypothesis has shown more accurate as the time period of DL increasesOuhodobic rates. At first glance, this may seem contrainuitive because there are more opportunities for variations. In practice, it may happen that a longer period of time gives more time to repair the market imperfections and for investors to get more information, which means that demand and supply even for the production of more predictable interest rates.