DEFINITION of 'Biased Expectations Theory'

A theory that the future value of interest rates is equal to the summation of market expectations. Proponents of the biased expectation theory argue that the shape of the yield curve is created by ignoring systematic factors and that the term structure of interest rates is solely derived by the market's current expectations.

BREAKING DOWN 'Biased Expectations Theory'

Two common biased expectation theories are the liquidity preference theory and the preferred habitat theory. The liquidity preference theory suggests that long-term bonds contain a risk premium and the preferred habitat theory suggests that the supply and demand for different maturity securities are not uniform and therefore there is a difference risk premium for each security.

RELATED TERMS
  1. Preferred Habitat Theory

    A term structure theory suggesting that different bond investors ...
  2. Expectations Theory

    The hypothesis that long-term interest rates contain a prediction ...
  3. Market Segmentation Theory

    A modern theory pertaining to interest rates stipulating that ...
  4. Demand Theory

    A theory relating to the relationship between consumer demand ...
  5. Revealed Preference

    An economic theory of consumption behavior which asserts that ...
  6. Dow Theory

    A theory which says the market is in an upward trend if one of ...
Related Articles
  1. Investing

    Interest Rate Predictions With Expectations Theory

    The expectations theory uses long-term interest rates to predict future short-term interest rates.
  2. Investing

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  3. Investing

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  4. Investing

    Understanding the Random Walk Theory

    The random walk theory states stock prices are independent of other factors, so their past movements cannot predict their future.
  5. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  6. Trading

    Manipulating Facts to Fit a Theory: A Dangerous Trading Practice

    This practice is common with experienced and new traders, and it can lead to huge losses. Find out how to avoid it.
  7. Investing

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
RELATED FAQS
  1. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  2. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
  3. What does market segmentation theory assume about interest rates?

    Learn about how the market segmentation theory for different maturities of interest rates seeks to describe the shape of ... Read Answer >>
  4. Is a good's production cost related to its value?

    Learn about the history and debate regarding the metrics used to determine the value of a good and which theories place emphasis ... Read Answer >>
  5. Which of the following statements is least accurate with respect to the various ...

    The correct answer is: b) The tax preference theory simply argues that capital gain return results in a higher after tax ... Read Answer >>
  6. What is capital structure theory?

    Discover capital structure theory as it relates to financial management and the methods in which companies attempt to raise ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center