According to Pure Expectations Theory, what does it emphasize?

Pure Expectations Theory primarily emphasizes the impact of expected changes in interest rates on the yield curve. It posits that the long-term interest rates can be understood as an average of short-term future interest rates that investors expect. This theory suggests that if investors anticipate that interest rates will rise in the future, the yield on long-term bonds will be higher than that of short-term bonds, reflecting these expectations. Conversely, if they expect a decline in interest rates, long-term yields will be lower.

This approach helps analysts and investors understand how changes in expectation regarding future economic conditions influence the current term structure of interest rates. It's a straightforward perspective on how market participants forecast the direction and magnitude of future interest rates based on available information.

The emphasis on expected changes differentiates this theory from others that incorporate specific risks or premiums, such as the liquidity premium or considerations related to bond characteristics. Hence, it predominantly centers on the role of interest rate expectations rather than other aspects that may influence yield.