What is the Market Segmentation Theory?
The market segmentation theory is a contemporary concept that states there is no direct relationship between the interest rates that prevail within short-term and long-term markets. Instead, the theory is that these two markets are distinct, and the interest rates will respond to whatever is occurring in the market where the options are traded. According to the essentials of the market segmentation theory, securities traded in a short-term market may be undergoing significant flux while the rates applied to long-term investments may remain somewhat static. Sometimes referred to as the segmented markets theory, the market segmentation theory is often considered to agree with and support what is known as the preferred habitat theory. This theory states that investors have very specific expectations when it comes to investing in securities with different lengths of maturity. As long as investors focus their trading activity on opportunities that comply with their preferences, those expect
