Quantifying U.S. Treasury Investor Optimism

29 Pages Posted: 1 Mar 2021 Last revised: 14 Jun 2021

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Hanno Lustig

Stanford University

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

Date Written: January 19, 2021

Abstract

When the government commits to a debt policy, the future value of government primary surpluses at all horizons is dictated by the debt dynamics under the risk-neutral measure. We compare the present discounted value of future surpluses implied by the U.S. federal government debt dynamics in a no-arbitrage bond pricing model to the PDV of actual government surpluses. Since the late 1990s, the debt-implied PDV of surpluses have consistently and persistently exceeded realized surpluses. They have also exceeded surplus forecasts resulting from tax and spending policy rules. U.S. Treasury investors appear to have been overly optimistic when assessing future surpluses.

Keywords: fiscal policy, debt sustainability, term structure, convenience yield

JEL Classification: H6, G1, E6

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Quantifying U.S. Treasury Investor Optimism (January 19, 2021). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3769510 or http://dx.doi.org/10.2139/ssrn.3769510

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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

Hanno Lustig (Contact Author)

Stanford University

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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New York University (NYU) ( email )

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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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