Preferred habitat theory
A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. The theory rejects the assertion that the risk premium must rise uniformly with maturity, but instead profits that to the extent that the demand for and supply of funds do not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances, as long as they are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk.
Nearby TermsPreferred dividend coverage Preferred equity redemption stock (PERC) Preferred habitat theory Preferred shares Preferred stock
Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University