What is the theory of market segmentation?

The theory of market segmentation is a current concept that states that there is no direct relationship between interest rates that prevail on short and long -term markets. Instead, the theory is that these two markets are different and interest rates will respond to everything that is happening on the market where options are traded. According to the basic theories of market segmentation, securities traded on the short -term market can pass through a significant flow, while rates applied to long -term investments can remain somewhat static.

Sometimes it is referred to as segmented market theory, the theory of market segmentation is often considered to be agreement and supports what is known as the preferred habitat theory. This theory states that investors have very specific expectations in investing in securities with different ripe lengths. As long as investors focus their business activities on opportunities that correspond to their preferences, these expectations remain in reason, including the degree of riskStor assumes. If the investor decides to buy and sell securities that carry maturity outside their preferences or habitat, this will have an impact on the amount of risk and requires the expectations of an increased return to compensate for this risk.

Proponents of the theory of market segmentation note that the evaluation of yield curves of short and long -term markets often shows that the degree of interest that applies seems to have only a small or no relationship to each other. It is found here that the yield curve associated with the market is based on the available range of options and on demand for them and fewer interest rates. At the same time, investors looking for a quick return will be more likely to focus their attention on the opportunity with a short maturity of the long -term market will be attracted by NTS to keep for a longer period of time. As it focuses on when the return will be realized and not of interest,which applies to investments with significantly different ripeness lengths, the theory in many situations seems to work well.

While there are supporters of the theory of market segmentation, not everyone agrees to the extent of the theory. Investors who commonly carry out investment transactions including short -term and long -term maturity do not necessarily believe that these two markets operate independently, especially in terms of interest rates. Instead, it is understood that there is at least the potential of the short -term market to influence rates on the long -term market and vice versa, especially for investors who focus more on rates and less on duration.