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

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Publication Details

Output type: Journal article

Author list: Cohen RB, Polk C, Vuolteenaho T

Publisher: Oxford University Press

Publication year: 2005

Journal: The Quarterly Journal of Economics (0033-5533)

Volume number: 120

Issue number: 2

Start page: 639

End page: 668

Number of pages: 30

ISSN: 0033-5533

eISSN: 1531-4650

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: http://papers.nber.org/papers/w11018.pdf

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.

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