Market Segmentation Theory vs. Preferred Habitat Theory

I was under the impression that the term structure of interest rates had four theories:

  1. Market Segmentation

2a. Expectations theory (unbiased)

2b. Liquidity preference theory (biased) = 2a + liquidity preference premium

2c. Preferred habitat theory (biased) = 2a + some premium that is related to supply and demand of securities at different maturities (not necessarily related to liquidity)

The CFA curriculum mentions ‘market segmentation’ in regards to the ICAPM. I remember seeing this market segmentation topic mentioned as part of term structure of interest rates. Am I misunderstanding something here? Your comments are appreciated.

OK, I found a resource. In vol 5 of the CFA I material it reads:

“A variant of the market segmentation theory is the preferred habitat theory. This theory argues that investors prefer to invest in particular maturity sectors as decidated by the nature of their liabilities. However, proponents of this thoery do not assert that investors would be willign to shift ouf of their preferred maturity sector, for a premium”

That explains it. I’m all set.

‘Market segmentation’ in ICAPM simply refers to what it literally means, i.e. if (international capital) markets are segmented, then assets with the same risk characteristics will be priced differently in different national markets.

‘Market segmentation theory’ is a different story, the one which stipulates that there is no necessary relationship between long and short-term interest rates blah blah.

There is no linkage between the two apart from the wording/meaning.

Oops, sorry, haven’t seen you solved your prob :slight_smile: