1. What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.

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12-07-2022
Business

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1. What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.

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jaquelinefvr jaquelinefvr · Answer 1 · 2022-07-12T18:41:15+02:00

Through the expectations hypothesis and the liquidity preference theory of the term structure of interest rates, liquidity must be zero for the forward rate to be equal to the expectations of future short rates.

What is expectation theory?

Corresponds to a forecast of short-term interest rates by analyzing them against current long-term interest rates.

Therefore, it is a theory used to assist in better understanding and forecasting short-term securities trading in the future.

Find out more about expectation theory here:

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