The U.S. Public Debt Valuation Puzzle

62 Pages Posted: 4 Mar 2019 Last revised: 4 May 2020

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

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. Bond investors fail to impose this no-arbitrage
restriction in the U.S., resulting in a government debt valuation puzzle. Both cyclical and long-run
dynamics of tax revenues and government spending make the surplus claim risky. Under a
realistic asset pricing model, this risk in surpluses creates a wedge of 287% of GDP between the
value of debt and that the surplus claim, and implies an expected return on the debt portfolio
that far exceeds the observed yield on Treasuries.

Keywords: government debt maturity, fiscal policy, term structure, interest rate risk

JEL Classification: E44, E62, G12, H6

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., The U.S. Public Debt Valuation Puzzle (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3333517 or http://dx.doi.org/10.2139/ssrn.3333517

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://https://sites.google.com/site/jayzedwye/

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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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/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://sites.google.com/view/mindyxiaolan

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