What is the difference between segmented market theory and preferred habitat theory

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They’re pretty similar - except, segmented market theory is when the participants are locked into their return/risk buckets and preferred habitat is has some flexibility if there is enough return to compensate for them the risk they will undertake.

Ex: Segmented Markets: Insurance co’s will usually buy longer yields for lower risk and forego short term yields at higher risk b/c they need to make sure they have $ for the future payouts of the claims.

Preferred Habitat: An older investor who usually likes to invest in lower rates for lower risk may potentially choose to purchase investments that are higher risk if he decides that the rate of return is worth it.

Segmented market Theory: the investor will want to match his term funding with his term assets. So every segment is uncorrelated with other maturity segments

Preferred habitat: investors will require a “premium”

for moving from their preferred habitat based on imbalabces between supply and demand of funds, investors will have to move away from their preferred habitat and then require a premium