The U.S. Public Debt Valuation Puzzle
69 Pages Posted: 24 Dec 2019 Last revised: 24 Apr 2021
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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: December 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.
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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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The U.S. Public Debt Valuation Puzzle
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