Structure of Interest Rates参考.ppt

2.1 The Term Structure of Interest Rates Pure Expectations Theory Conclusion: pure expectations theory explain well why yield curve shape will change with pass of time. It also explains well that when interest rate is low the yield curve always upward and when interest rate is high the yield curve always downward. Limitation: cannot explain why yield curve is usually upward. Question: if a long-term rate is expected to equal a geometric average of consecutive short-term rates covering the same time horizon, which security (short or long) investor will select to invest? 2.2 The Term Structure of Interest RatesLiquidity Premium Theory Liquidity Premium Theoryassumptions Investors prefer short-term, more liquid, securities Long-term securities and associated risks are desirable only with increased yields (liquidity premium) Liquidity may be a critical factor to investors at particular points in time Assumes that maturity preferences have little influence on investors (perfect substitutes) 2.2 The Term Structure of Interest RatesLiquidity Premium Theory Liquidity premium theoryanalysis Explains upward-sloping yield curve When combined with the expectations theory, yield curves could still be used to interpret interest rate expectations The liquidity premium would be influential on the difference between annualized interest rates (0LP1LP2LP3……LP20) Change the equation of forward rate (P69) 2.2 The Term Structure of Interest RatesLiquidity Premium Theory Conclusion: a flat curve could be interpreted as that interest rate will decrease and a upward curve would be interpreted as no change in interest rate Limitation: cannot explain the different shape of yield curve solely 2.3 The Term Structure of Interest Rates Segmented Markets Theory Segmented Markets Theoryassumptions Assumes investors have maturity preference boundaries, e.g., short-term vs. long-term maturities Assumes that securities with different maturities cannot substitutes totally Shifting by investors in d