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Money Illusion in the Stock Market: The Modigliani-Cohn HypothesisRandolph B. CohenHarvard Business School - Finance Unit Christopher PolkLondon School of Economics Tuomo VuolteenahoArrowstreet 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 working papers seriesDate posted: January 12, 2005Suggested CitationContact Information
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