The segmented markets theory rejects two of the assumptions of the expectations theory,namely:
A) there are a large number of financial investors who hold homogeneous expectations about future interest rates and no impediments to market rates moving to equilibrium.
B) there are no transactions costs and investors hold homogeneous expectations.
C) that investors are indifferent between short-term or long-term bonds and that all bonds are perfect substitutes.
D) there is no impediment to market rates moving to equilibrium and the goal of investors is to maximise their expected rate of return.

Question

Quizplus · Accepted Answer

The segmented markets theory suggests that markets for different maturity bonds are distinct and not directly competitive, rejecting the idea that investors are indifferent between short-term and long-term bonds (implying they are not perfect substitutes) and other assumptions of the expectations theory that imply a single, unified bond market.

The Segmented Markets Theory Rejects Two of the Assumptions of the Expectations