QUESTION 26 In 1986, Campbell Harvey published his dissertation linking yield curve inversions to recessions. He studied the four recessions from the 1960s to 1980s and his indicator proved to be accurate. In the three recessions that followed his dissertation, the yield curve again inverted before each one-Including the 2008 global financial crisis. Based on the theories we have covered in our class, why do yield curve inversions usually precede recessions? Hint: You must solve this question based on our lecture notes, not any other theory or material. O Both pure expectations theory and liquidity premium theory can explain why yield curve inversions usually precede recessions. Based on either pure expectations theory or liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bil rates) are usually associated with recessions, if investors expect the future short-term rates to decline, they are essentially expecting and predicting a recession Both market segmentation theory and liquidity premium theory can explain why yield Curve inversions usually precede recessions. Based on either market segmentation theory or liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bill rates) are usually associated with recessions, it investors expect the future short-term rates to decline, they are essentially expecting and predicting a recession Only liquidity premium theory can explain why yield curve inversions usually precede recessions. Based on liquidity premium theory, if short-term interest rates are expected to fall dramatically in the future, then the average of the expected short-term rates is well below the current short-term rato. Even when the positive liquidity premium is added to this average, the resulting long-term rate will still be lower than the current short-term interest rate. Only pure expectations theory can explain why yield curve inversions usually precede recessions. Based on pure expectations theory, when short-term rates are expected to rise in future, average of future short-term ratos is above today's short-term rate; therefore, the long-term rate is higher than today's short-term rate and the yield curve is upward sloping Only liquidity premium theory can explain why yield Curve inversions usually precede recessions. Based on liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bil rates) are usually associated with recessions, if investors expect the future short termates to decline, they are essentially expecting and predicting a recession QUESTION 26 In 1986, Campbell Harvey published his dissertation linking yield curve inversions to recessions. He studied the four recessions from the 1960s to 1980s and his indicator proved to be accurate. In the three recessions that followed his dissertation, the yield curve again inverted before each one-Including the 2008 global financial crisis. Based on the theories we have covered in our class, why do yield curve inversions usually precede recessions? Hint: You must solve this question based on our lecture notes, not any other theory or material. O Both pure expectations theory and liquidity premium theory can explain why yield curve inversions usually precede recessions. Based on either pure expectations theory or liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bil rates) are usually associated with recessions, if investors expect the future short-term rates to decline, they are essentially expecting and predicting a recession Both market segmentation theory and liquidity premium theory can explain why yield Curve inversions usually precede recessions. Based on either market segmentation theory or liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bill rates) are usually associated with recessions, it investors expect the future short-term rates to decline, they are essentially expecting and predicting a recession Only liquidity premium theory can explain why yield curve inversions usually precede recessions. Based on liquidity premium theory, if short-term interest rates are expected to fall dramatically in the future, then the average of the expected short-term rates is well below the current short-term rato. Even when the positive liquidity premium is added to this average, the resulting long-term rate will still be lower than the current short-term interest rate. Only pure expectations theory can explain why yield curve inversions usually precede recessions. Based on pure expectations theory, when short-term rates are expected to rise in future, average of future short-term ratos is above today's short-term rate; therefore, the long-term rate is higher than today's short-term rate and the yield curve is upward sloping Only liquidity premium theory can explain why yield Curve inversions usually precede recessions. Based on liquidity premium theory, a yield curve inversion implies that short-term interest rates are expected to fall in the future so that the average of the expected short-term rates is below the current short-term rate. Since low short-term interest rates (especially the T-bil rates) are usually associated with recessions, if investors expect the future short termates to decline, they are essentially expecting and predicting a recession