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Unlike under the Expectation Hypothesis (for which the forwards are perfect predictors of the expected short rates), for the LPH forward=expected short rates + LP and consequently the expected short rates (from which we back up the yield curve)=forward - LP (where LP= liquidity premium). Below I leave two practical questions on which my doubts arise. In the first, it is explained that under the LPH, "the downturn could last longer than suggested by the EH, as the yield curve might be pushed upward due to the liquidity premium". In this sense, shouldn't it be specified that the curve we are observing refers to forwards to say this or can we simply infer it from the fact that the actual yield curve will be in the middle of the forward curve and the expected short rates curve? For the second question, however, we are provided with forward rates. Under the LPH, the latter are equal to the expected short rates + LP but the solutions add the LP instead. enter image description here

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