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 towards risk. Our empirical resuts support the hypothesis that the stock market suffers from money illusion.

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The Stock Market Suffers from Money Illusion

Jan Publication status: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. AP Contact details of provider: National Bureau of Economic Research, Massachusetts Avenue Cambridge, MA , U.

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Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis* | The Quarterly Journal of Economics | Oxford Academic

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