THE U.S. PUBLIC DEBT VALUATION PUZZLE

Zhengyang Jiang; Hanno Lustig; Stijn VAN NIEUWERBURGH; Mindy Z. Xiaolan

doi:10.3982/ECTA20497

THE U.S. PUBLIC DEBT VALUATION PUZZLE

Zhengyang Jiang, Hanno Lustig, Stijn VAN NIEUWERBURGH, Mindy Z. Xiaolan

Finance

Research output: Contribution to journal › Conference article › peer-review

Abstract

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the United States. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

Original language	English (US)
Pages (from-to)	1309-1347
Number of pages	39
Journal	Digest of Technical Papers - SID International Symposium
Volume	55
Issue number	1
DOIs	https://doi.org/10.3982/ECTA20497
State	Published - 2024
Event	International Symposium, Seminar, and Exhibition, Display Week 2024 - San Jose, United States Duration: May 12 2024 → May 17 2024

Keywords

Bond pricing
convenience yield
fiscal policy
term structure

ASJC Scopus subject areas

General Engineering

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10.3982/ECTA20497

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title = "THE U.S. PUBLIC DEBT VALUATION PUZZLE",

abstract = "The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the United States. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.",

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N2 - The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the United States. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

AB - The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no-arbitrage restriction in the United States. Both cyclical and long-run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

KW - Bond pricing

KW - convenience yield

KW - fiscal policy

KW - term structure

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THE U.S. PUBLIC DEBT VALUATION PUZZLE

Abstract

Keywords

ASJC Scopus subject areas

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