Expectations Hypothesis Theories

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Expectations hypothesis theories

Theories of the term structure of interest rates, which include the pure expectations theory; the liquidity theory of the term structure, and the preferred habitat theory. These theories hold that each forward rate equals the expected future interest rate for the relevant period. These three theories differ, however, on whether other factors also affect forward rates, and how.

Unbiased Expectations Hypothesis

In foreign exchange, a theory that forward exchange rates for delivery at some future date are equal to the spot rates for that date. The hypothesis only functions in the absence of a risk premium. Critics contend that the unbiased expectations evidence shows that unbiased expectations do not occur in actual trading. It is also called an unbiased predictor.

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