Market Segmentation Theory

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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.

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  1. Where did market segmentation theory come from?

    The first official proposal of market segmentation theory (MST) appeared in J.M. Culbertson's "The Term Structure of Interest ... Read Full Answer >>
  2. What does market segmentation theory assume about interest rates?

    Market segmentation theory states there is no relationship between the markets for bonds of different maturity lengths. MST ... Read Full Answer >>
  3. What are the benefits of using ceteris paribus assumptions in economics?

    Most, though not all, economists rely on ceteris paribus conditions to build and test economic models. The reason they do ... Read Full Answer >>
  4. What is the difference between the rule of 70 and the rule of 72?

    The rule of 70 and the rule of 72 give rough estimates of the number of years it would take for a certain variable to double. ... Read Full Answer >>
  5. What is the risk return tradeoff for bonds?

    Macaulay duration and modified duration are mainly used to calculate the durations of bonds. The Macaulay duration calculates ... Read Full Answer >>
  6. What is the formula for calculating the capital to risk weight assets ratio for a ...

    Use the Macaulay duration to calculate the duration of a zero-coupon bond. The resulting Macaulay duration of a zero-coupon ... Read Full Answer >>
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