Which theory suggests that legal restrictions and personal preferences limit investors' choices to specific ranges of maturities?

The Market Segmentation Theory suggests that investors have specific maturity preferences based on their individual needs and circumstances, which are often influenced by legal restrictions and personal preferences. This theory posits that the bond market is segmented into different maturity ranges, such as short-term, intermediate, and long-term securities. Investors typically feel more comfortable investing within a certain maturity segment due to factors like liquidity needs, risk tolerance, and investment horizons.

For example, institutional investors may be restricted by regulations that dictate the types of securities they can hold, while individual investors may have personal preferences that lead them to favor certain maturities. These factors result in a limited choice for investors, confining their decisions to specific maturity ranges rather than a continuous spectrum. Thus, the Market Segmentation Theory effectively explains why investor behavior can lead to distinct, segmented markets for bonds of varying maturities.