The U.S. Public Debt Valuation Puzzle

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Event details

Date and time 02.10.2020 10:3012:00  
Place and room
Zoom
Speaker Hanno LUSTIG, Stanford
Category Conferences - Seminars

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. Under a realistic asset pricing model, this risk in surpluses creates a wedge of 287% of GDP between the value of debt and that the surplus claim, and implies an expected return on the debt portfolio that far exceeds the observed yield on Treasuries.
Paper: 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3333517