Fiscal Limits and Sovereign Credit Spreads

Pallara, Kevin; Renne, Jean‐Paul

doi:10.2139/ssrn.3475425

Cited by 9 publications

(5 citation statements)

References 102 publications

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“…, where χ t,t+h is an indicator variable that is one when the government defaults between t and t + h. We assume full default to keep the proof simple, but this is without loss of generality. Chernov et al (2020) and Pallara and Renne (2019) study the response of CDS spreads to news about the fiscal surplus. claim as:…”

Section: Discount Ratesmentioning

confidence: 99%

The U.S. Public Debt Valuation Puzzle

Jiang¹,

Lustig²,

Nieuwerburgh³

et al. 2019

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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 longrun 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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Section: Discount Ratesmentioning

confidence: 99%

The U.S. Public Debt Valuation Puzzle

Jiang¹,

Lustig²,

Nieuwerburgh³

et al. 2019

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show abstract

“…Their model can account for elevated credit default swap (CDS) risk premia in advanced economies like the United States during the global financial crisis. Pallara & Renne (2019) also consider the effect of default on sovereign CDS risk premia. In related work, and consider the effect of equilibrium fiscal risk on other asset prices.…”

Section: The Risk On the Treasury Balance Sheetmentioning

confidence: 99%

Fiscal Capacity: An Asset Pricing Perspective

Jiang

Lustig

Nieuwerburgh

et al. 2023

Annu. Rev. Financ. Econ.

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This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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“…We contribute to a recent literature at the intersection of asset pricing and public finance. Chernov, Schmid, and Schneider (2020); Pallara and Renne (2019) argue that higher CDS premia for U.S.…”

Section: Introductionmentioning

confidence: 99%

The U.S. Public Debt Valuation Puzzle

Jiang,

Lustig,

Van Nieuwerburgh

et al. 2024

ECTA

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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.

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Fiscal Limits and Sovereign Credit Spreads

Cited by 9 publications

References 102 publications

The U.S. Public Debt Valuation Puzzle

The U.S. Public Debt Valuation Puzzle

Fiscal Capacity: An Asset Pricing Perspective

The U.S. Public Debt Valuation Puzzle

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