Download This PaperThe U.S. Public Debt Valuation Puzzle
87 Pages Posted: 4 Mar 2019 Last revised: 17 May 2024
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The U.S. Public Debt Valuation Puzzle
The U.S. Public Debt Valuation Puzzle
The U.S. Public Debt Valuation Puzzle
Date Written: October 10, 2019
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 U.S. 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. Treasurys may be overpriced.
Keywords: government debt maturity, fiscal policy, term structure, interest rate risk
JEL Classification: E44, E62, G12, H6
Suggested Citation: Suggested Citation
Hanno N. Lustig
Stanford Graduate School of Business ( email )
Stanford GSB
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Stanford, CA California 94305-6072
United States
3108716532 (Phone)
Stijn Van Nieuwerburgh (Contact Author)
Columbia University Graduate School of Business ( email )
3022 Broadway
Uris Hall 809
New York, NY New York 10027
United States
HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/
Mindy Z. Xiaolan
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
HOME PAGE: http://sites.google.com/view/mindyxiaolan