The U.S. Public Debt Valuation Puzzle

73 Pages Posted: 4 Mar 2019 Last revised: 15 Dec 2019

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); New York University Stern School of Business, Department of Finance

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Date Written: October 10, 2019

Abstract

The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasurys are much larger than previously thought and/or U.S. Treasury markets have failed to enforce the no-bubble condition.

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
United States

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

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

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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