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amqata

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发表于 2011-7-11 20:11 | 只看该作者
Paraguay, I think some of what you said about investors' preference for their given spot is more relevant to the Market Segmentation Theory.

The Liquidity Preference Theory simply posits a maturity premium above the expected rate. So an upwards sloping yield curve which under Pure Expectations indicates higher rates expected could in theory under LPT encompass lower or flat future rates expected.

A flat curve, as in the question, under LPT (once you account for the maturity premium) indicates lower rates expected. The maturity premium is related to inflation expectations, so theoretically the premium could be nil, in which case flat future rates might be indicated. However, this is exceptional, and the answer was surely lower rates expected.

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Bluetick1010

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发表于 2011-7-11 20:11 | 只看该作者
The LPT and MST are very close though. MST can explain kinked curves much better than LPT though.

Answer is surely decrease though.

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Londonrocks

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发表于 2011-7-11 20:11 | 只看该作者
I went with A. Liquidity preference means even though it's flat, a premium is still required so it will increase

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rkapoor

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14#
发表于 2011-7-11 20:11 | 只看该作者
billbelemy22 Wrote:
-------------------------------------------------------
> I went with A. Liquidity preference means even
> though it's flat, a premium is still required so
> it will increase


You just explained why it will decrease...

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thisisbrianly

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15#
发表于 2011-7-11 20:11 | 只看该作者
billbelemy22, the yield curve was a given - we were being asked to interpret the implied expectations about the direction of short term interest rates. Accordingly to LPT the yield curve represents expectations + a premium. Once you subtract the premium the implication is that short term rates are headed downwards. In other words, the premium makes flat what would otherwise (under Pure Expectations) be a downwards sloping yield curve.

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