Question

1. What are the 2-4 differences between the Liquidity Preference Theory on the one hand and the Hedging Pressure and Unbiased Expectations Theories on the other?

2. What is the reasoning for Segmented Markets Hypothesis to also be called the Hedging-Pressure Theory?

Answer 1

-- The Liquidity premium theory is more plausible , in conjunction with the unbiased expectations theory as it provides an explanation on the yield or return on the basis of the involvement of risk in the taking the bonds. The larger the risk, longer the expiration, thus more the return or yield. On contrary, unbiased expectations theory suggests the alignment of the rates of interest with equating the two different period bonds.

-- The liquidity preference theory, in contrast to the unbiased expectations theory, states that an upward sloping term structure is likely to expect to occur more compared to a downward sloping term structure.

-- The liquidity preference theory states that often the borrowers prefer long-term bonds for elimination of the risk of having to refinance at higher rates of interest in future periods. On the other hand the unbiased expectations theory contends that the rate in the long-term is the geometric mean of the intervening the rates in short-term.

As per policy we have to answer first question