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


Randolph B. Cohen


Harvard Business School - Finance Unit

Christopher Polk


London School of Economics

Tuomo Vuolteenaho


Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

January 2005

NBER Working Paper No. w11018

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.

Number of Pages in PDF File: 39

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Date posted: January 12, 2005  

Suggested Citation

Cohen, Randolph B. and Polk, Christopher and Vuolteenaho, Tuomo, Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis (January 2005). NBER Working Paper No. w11018. Available at SSRN: http://ssrn.com/abstract=647384

Contact Information

Randolph B. Cohen
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6674 (Phone)
617-496-6592 (Fax)
Christopher Polk
London School of Economics ( email )
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/polk/
Tuomo Vuolteenaho (Contact Author)
Arrowstreet Capital, LP ( email )
44 Brattle St., 5th Floor
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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