The U.S. Public Debt Valuation Puzzle

68 Pages Posted: 4 Mar 2019 Last revised: 13 Apr 2021

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); ABFER; New York University (NYU)

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Multiple version iconThere are 3 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. In a realistic asset pricing model, this risk in surpluses creates a wedge of 2.5 times GDP between the value of debt and that of 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://sites.google.com/site/jayzedwye/

Hanno N. Lustig

Stanford Graduate School of Business ( email )

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Columbia University Graduate School of Business ( email )

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Mindy Z. Xiaolan

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

Red McCombs School of Business
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United States

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

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