Market Segmentation Theory

AAA

DEFINITION of 'Market Segmentation Theory'

A modern theory pertaining to interest rates stipulating that there is no necessary relationship between long and short-term interest rates. Furthermore, short and long-term markets fall into two different categories. Therefore, the yield curve is shaped according to the supply and demand of securities within each maturity length.

INVESTOPEDIA EXPLAINS 'Market Segmentation Theory'

Also called the "Segmented Markets Theory", this idea states that most investors have set preferences regarding the length of maturities that they will invest in. Market segmentation theory maintains that the buyers and sellers in each of the different maturity lengths cannot be easily substituted for each other. An offshoot to this theory is that if an investor chooses to invest outside their term of preference, they must be compensated for taking on that additional risk. This is known as the Preferred Habitat Theory.

RELATED TERMS
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  2. Liquidity Preference Theory

    The idea that investors demand a premium for securities with ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective ...
  4. Market

    1. A medium that allows buyers and sellers of a specific good ...
  5. Realized Yield

    The actual amount of return earned on a security investment over ...
  6. Preferred Habitat Theory

    A term structure theory suggesting that different bond investors ...
Related Articles
  1. The Five Biggest Stock Market Myths
    Investing Basics

    The Five Biggest Stock Market Myths

  2. Forces Behind Interest Rates
    Economics

    Forces Behind Interest Rates

  3. How Interest Rates Affect The Stock ...
    Investing Basics

    How Interest Rates Affect The Stock ...

  4. What Investors Should Know About Interest ...
    Investing Basics

    What Investors Should Know About Interest ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center