The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory.

Question

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The market segmentation theory suggests that different groups of investors have different preferences for the maturity of debt securities, and the behavior of these investors results in the formation of different segments of the market, which in turn affects the shape of the yield curve. Thus, the behavior of various financial institutions such as banks, pension funds, insurance companies, etc., plays a crucial role in determining the shape of the yield curve.

The Behavior of Various Kinds of Financial Institutions Determines the Shape