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The expectations hypothesis of the term structure of interest rates (whose graphical representation is known as the yield curve) is the proposition that the long-term rate is determined purely by current and future expected short-term rates, in such a way that the expected final value of wealth from investing in a sequence of short-term bonds equals the final value of wealth from investing in ...
The preferred habitat theory is a variant of the liquidity premium theory, and states that in addition to interest rate expectations, investors have distinct investment horizons and require a meaningful premium to buy bonds with maturities outside their "preferred" maturity, or habitat.
An affine term structure model is a financial model that relates zero-coupon bond prices (i.e. the discount curve) to a spot rate model. It is particularly useful for deriving the yield curve – the process of determining spot rate model inputs from observable bond market data.
"Horizon of expectation" (German: Erwartungshorizont) is a term fundamental to German academic Hans Robert Jauss's reception theory.The concept is a component of his theory of literary history where his intention is to minimise the gulf between the schools of literature and history which have previously relegated the reader to play only a minor role in the interpretation of literature. [1]
The concept of rational expectations was first introduced by John F. Muth in his paper "Rational Expectations and the Theory of Price Movements" published in 1961. Robert Lucas and Thomas Sargent further developed the theory in the 1970s and 1980s which became seminal works on the topic and were widely used in microeconomics. [1] Significant ...
This analysis would, however, be subject to the Lucas Critique, and the conclusion would be misleading. In order to properly analyze the trade-off between the probability of a robbery and resources spent on guards, the "deep parameters" (preferences, technology and resource constraints) that govern individual behaviour must be taken explicitly ...
The forward curve is a function graph in finance that defines the prices at which a contract for future delivery or payment can be concluded today. For example, a futures contract forward curve is prices being plotted as a function of the amount of time between now and the expiry date of the futures contract (with the spot price being the price at time zero).
The proposition in probability theory known as the law of total expectation, [1] the law of iterated expectations [2] (LIE), Adam's law, [3] the tower rule, [4] and the smoothing theorem, [5] among other names, states that if is a random variable whose expected value is defined, and is any random variable on the same probability space, then