Market Segmentation Theory


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.

BREAKING DOWN '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.

  1. Market

    A medium allowing buyers and sellers of a specific good or service ...
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective ...
  3. Liquidity Preference Theory

    The idea that investors demand a premium for securities with ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  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 ...
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  1. What are some examples of businesses that use market segmentation?

    Numerous types of businesses use market segmentation to optimize their ability to sell to a wide variety of consumers. From ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  6. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>

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