There is some well-documented persistence in deviations of the funds rate from the funds rate target. For example, see Taylor (2001). 8 This and subsequent analyses ignore the possibility of a small premium in the futures market, documented by Robertson and Thornton (1997), because any such premium is so small that its existence would have a negligible impact.

No abstract

It is widely believed that the

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This paper tests the expectations hypothesis (EH) using U.S. monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from one month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power by introducing economic variables as conditioning information and by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined.