A THEORY OF HUMPBACKED BOND YIELD CURVES.

The existence of humpbacked bond yield curves has been well documented. Yet theoretical explanations of this phenomenon have been deficient. The pure expectations hypothesis can explain humpbacked curves to be the result of a series of rising and then falling forward rates. But this explanation suffers from the drawbacks of the expectations hypothesis that have been pointed out in the literature. This paper offers a new explanation of humpbacked curves that builds upon the work of Malkiel [3]. It will be shown below that humpbacked curves may occur if the distributions of interest rates expected to prevail one period hence are skewed. [ABSTRACT FROM AUTHOR]