What does Segmented Market Theory emphasize?

Segmented Market Theory emphasizes that different investors choose securities based on specific cash needs. This theory suggests that the bond market is made up of distinct segments, with each segment catering to the preferences and requirements of different groups of investors. For instance, some investors may prefer short-term securities due to their liquidity needs, while others may seek long-term securities for more stable income over a longer horizon.

This approach recognizes that not all investors are alike; they have varying risk tolerances, investment goals, and timelines. As a result, their choices will shape the demand for different maturities and types of securities, ultimately impacting interest rates within those segments. This understanding drives home the notion that investor behavior is not solely geared towards maximizing yield but also considers individual investment preferences and objectives.