What is EXPECTATIONS HYPOTHESIS?

Mathematical formula calculating potential future interest rates. If the following equation is true: (1 + RLt) squared = (1 + RSt) ( 1 + RS*t+1), given RS is the 1-year interest rate, RL is the 2-year interest rate and the following year’s short term interest rate is predicted with RS*t+1, then an equal expected return occurs for 1- and 2-year investments.

More On This Topic




Link to This Definition

Did you find this definition of EXPECTATIONS HYPOTHESIS helpful? You can share it by copying the code below and adding it to your blog or web page.
Written and fact checked by The Law Dictionary