theories of interest rate determination
Expectations Theory: The Expectations Theory states that the current interest rate is equal to the expected future interest rates. This theory believes that market participants are likely to set today’s prices based on their expectations of what will happen in the future and adjusts accordingly.
Segmentation Theory: Market Segmentation Theory suggests that different groups within a market or economy may respond differently to changes in economic variables. For example, people with higher incomes may be less sensitive to fluctuations in inflation than people with lower incomes. Thus policies aimed at one group may have a greater effect on another.
Preferred Habitat Hypothesis Theory: The Preferred Habitat Hypothesis states that investors prefer certain types of securities or markets over others depending on their risk preferences and investment goals. This theory suggests that investors are drawn to certain markets due to factors such as past performance and familiarity with these securities/markets leading them to choose investments based on preference rather than solely focusing on potential returns.