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

Cohen, Randolph B, Polk, Christopher and Vuolteenaho, Tuomo (2005) Money illusion in the stock market: The Modigliani-Cohn hypothesis. Quarterly Journal of Economics, 120 (2). pp. 639-668. ISSN 0033-5533

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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.

Item Type: Article
Official URL: http://mitpress.mit.edu/QJE
Additional Information: © 2005 MIT Press
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 15 Sep 2008 09:21
URL: http://eprints.lse.ac.uk/15302/

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