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

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Author Info
Randolph B. Cohen
Christopher Polk
Tuomo Vuolteenaho

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11018.

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Date of creation: Jan 2005
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Handle: RePEc:nbr:nberwo:11018

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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  4. Jeremy C. Stein, 1996. "Rational Capital Budgeting in an Irrational World," NBER Working Papers 5496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March. [Downloadable!] (restricted)
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  6. Shleifer, Andrei & Vishny, Robert W, 1990. "Equilibrium Short Horizons of Investors and Firms," American Economic Review, American Economic Association, vol. 80(2), pages 148-53, May. [Downloadable!] (restricted)
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  9. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Inflation Illusion and Stock Prices," NBER Working Papers 10263, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452. [Downloadable!] (restricted)
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  12. K.C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1991. "Risk and Return on Real Estate: Evidence from Equity REITs," NBER Working Papers 3311, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Fernandez, Pablo & Aguirreamalloa, Javier & Liechtenstein, Heinrich, 2009. "The equity premium puzzle: High required equity premium, undervaluation and self fulfilling prophecy," IESE Research Papers D/821, IESE Business School. [Downloadable!]
  2. Lupia, Arthur & Krupnikov, Yanna & Levine, Adam Seth & Grafstrom, Cassandra & MacMillan, William & McGovern, Erin, 2008. "How “Point Blindness” Dilutes the Value of Stock Market Reports," MPRA Paper 9612, University Library of Munich, Germany. [Downloadable!]
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  3. Alain Durré & Pierre Giot, 2005. "An international analysis of earnings, stock prices and bond yields," Research series 200509-1, National Bank of Belgium. [Downloadable!]
    Other versions:
  4. Maik Schmeling & Andreas Schrimpf, 2008. "Expected Inflation, Expected Stock Returns, and Money Illusion: What can we learn from Survey Expectations?," SFB 649 Discussion Papers SFB649DP2008-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  5. Monika Piazzesi & Martin Schneider, 2007. "Inflation Illusion, Credit, and Asset Pricing," NBER Working Papers 12957, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Lupia, Arthur & Grafstrom, Cassandra & Krupnikov, Yanna & Levine, Adam Seth & MacMillan, William & McGovern, Erin, 2007. "Loonies Under Your Bed: Misdirected Attention and the Diluted Value of Stock Market Reports," MPRA Paper 4912, University Library of Munich, Germany. [Downloadable!]
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