Segmented Markets and Preferred Habitat

CFA Level II Fixed Income
#1

Hello CFA friends,

I am having trouble differentiating the segmented markets theory against the preferred habitat interest rate theory.

Does anyone have a good way of understanding these or remembering the difference?

Thanks in advance

#2

Hi probstytoasty,

The way I understand it is that the difference between them is, preferred habitat theory assumes that investors can be induced into moving into another segment market or invest in another security if given a better investment return but it is not the case with the segmented markets theory as they will remain in that market only and the equilibrium pricing will be determined by demand and supply functions solely.

Cheers