What is the theory of expectations?

Also known as anticipation theory, expectation theory is the strategy that investors use to predict for future interest rate performance. The theory of expectation essentially states that the evaluation of current long -term interest rates can be determined the course of short -term interest rates. Although there are a number of supporters for this theory, many investors and financial experts also believe that the logic of anticipation theory is wrong and does not serve as an accurate indicator of future short -term rates in itself.

For those who believe that the concept of expectation theory is merit, it is often noted that many investment strategies rely on the evaluation of past movements to predict future performance. Since this approach has proved to be successful in helping to select wise investments, such as stocks and commodities, the same approach can also be used to predict short -term interest rates. Often, supporters of theory also point to the unofficial evidence they seem to supportthis approach.

Detractors sometimes note that while the idea of ​​theory of expectation may be useful in predicting future movements, it cannot fulfill the task of performing correct projections without cooperation using other sources. In other words, the theory of expectations is fine when it is used as one factor in deciding on investment, but it is very likely that it will lead to false projections if used separately. For this reason, critics usually urge that the theory is used in conjunction with other strategies or not to use at all.

One of the natural dangers with the theory of anticipation is that it can be a very simple overcome estimation of future short -term rates. Since the theory relies only on the analysis of the previous long -term interest rate performance, this approach can easily omit Datato would perhaps reduce the amount of short -term interest rates change. Factors likeThere are political shifts, disasters or sudden changes in the taste and requirements of consumer, can easily affect the direction of interest rates and cause projections developed by this theory outside the line.

The theory of anticipation also does not take into account the element of risk, which can also affect the level of interest rates in general. For example, theory does not recognize the fact that transmission rates do not always provide a clear picture of future rates, a situation that causes the risk of investing in short -term bonds rather than long -term bond problems. The theory also does not include the possibility of reinvestment, and therefore introduces a new factor that can have a dramatic impact on interest rates.

In general, expectation theory is not considered to be the most reliable approach itself. Sometimes, however, it can be temporary as a means of double control of the predictions performed using a wider base of factors. This is because with regard to the status of long -term interest rates in the tandem with these other factsRY can help minimize a room for an error that would exist if the rates were completely excluded from the assessment.