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Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis

Randolph B. Cohen, Christopher Polk and Tuomo Vuolteenaho

No 11018, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Modigliani and Cohn [1979] hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors towards risk. Our empirical resuts support the hypothesis that the stock market suffers from money illusion.

JEL-codes: G12 G14 N22 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-fmk and nep-rmg
Note: AP
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Citations: View citations in EconPapers (111)

Published as Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 639-668, May.

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