What are the theories about the yield curve shape?

As we know, the yield curve can be upward sloping, downward sloping or flat. There are three theories about the shape of the yield curve. These are;

  1. Market segmentation theory: There is short-term and long term separation for markets and investors. The yield curve is probably upward, downward or flat.
  2. Liquidity preference theory: Short-term securities are preferred to long-term securities because short-term ones are liquid. The yield curve must be upward sloping.
  3. Expectations theory: Based on the economic factors’ expectations, the yield curve can be upward, downward or flat.