The U.S. Public Debt Valuation Puzzle

Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan

doi:10.3982/ecta20497

Econometrica Vol. 92 No. 4 2024

The U.S. Public Debt Valuation Puzzle

Zhengyang Jiang^1,2; Hanno Lustig^3,2,4; Stijn Van Nieuwerburgh^5,2,6; Mindy Z. Xiaolan⁷

¹ Finance Department, Kellogg School of Management, Northwestern University · ² NBER · ³ Department of Finance, Stanford Graduate School of Business · ⁴ SIEPR · ⁵ Department of Finance, Columbia Business School, Columbia University · ⁶ CEPR , · ⁷ McCombs School of Business, The University of Texas at Austin ,

Abstract

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no‐arbitrage restriction in the United States. 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 large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

DOI: 10.3982/ecta20497
Volume: 92
Issue: 4
Pages: 1309-1347
Language: en
Sources: bibtex:phds-export.bib openalex crossref

The U.S. Public Debt Valuation Puzzle

Abstract

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