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| Term of the Day liquidity preference theory Observation that, all else being equal, people prefer to hold on to cash (liquidity) and that they will demand a premium for investing in non-liquid assets such as bonds, stocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as theperiod (term) for getting the cash back increases. The rate in the increase of this premium, however, slows down with the increase in term. In the language of financial trading, this theory is expressed as "forward rates should exceed the future spot rates." This concept was first expressed by the U.K. preference hypothesis. |
Term of the Day liquidity preference theory
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