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Money illusion in the stock market: The Modigliani-Cohn hypothesis

By Randolph B Cohen, Christopher Polk and Tuomo Vuolteenaho

Abstract

Modigliani and Cohn 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 toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion

Topics: HB Economic Theory
Publisher: MIT Press
Year: 2005
DOI identifier: 10.1162/0033553053970133
OAI identifier: oai:eprints.lse.ac.uk:15302
Provided by: LSE Research Online
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