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Does the US government hedge against government expenditure risk?

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Author Info

  • Sevin Yeltekin
  • Hanno Lustig
  • Chris Sleet

Abstract

Standard theory prescribes that the government hedge against shocks to its expenditures by generating total debt portfolio returns with a negative beta on government expenditure innovations. This paper asseses how well the government manages its debt portfolio against the benchmark government debt beta generated in a Ramsey economy. We identify exogenous innovations to government expenditures using standard VAR methodology and compute the beta of total government debt returns with respect to these government expenditure innovations. In addition, we conduct an event study by identifying exogenous events that signal a shock to the US government's expenditure process and compute the abnormal returns on the government's debt portfolio around these events. We use the stock returns for firms in the defense industry and the returns for other government contractors to extract information about the size and persistence of the shocks to government expenditures. Finally, we conclude by linking the US total debt portfolio beta to the government debt betas on different maturities. This allows us to make inference about the optimal state-dependent maturity composition.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 48.

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Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:48

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Related research

Keywords: Ramsey taxation; event study; Asset Pricing;

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Cited by:
  1. Hanno Lustig & Christopher Sleet & Sevin Yeltekin, 2005. "Fiscal Hedging and the Yield Curve," NBER Working Papers 11687, National Bureau of Economic Research, Inc.
  2. M Saifur Rahman, 2008. "Should Dynamic Scoring be done with Heterogeneous Agent-Based Models? Challenging the Conventional Wisdom," Caepr Working Papers 2008-023, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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