Compounding Money and Nominal Price Illusions

Authors

• Mustafa O. Caglayan, Florida International University College of Business
• Diogo Duarte, Florida International University College of Business
• Victor F. Duarte, Gies College of Business
• Xiaomeng Lu, Georgia College & State University

Document Type

Article

Publication Date

6-1-2025

Publication Title

Management Science

Abstract

We develop a general equilibrium model in which investors simultaneously experience money and nominal price illusions. We show that the combined effects of these illusions widen the gap between the elasticities of the earnings yield of low- and high-priced stocks relative to the nominal interest rate. Empirically, we show that the compounded effects of money and nominal price illusions are stronger for low-priced stocks during periods of high inflation and economic downturns and for stocks with low institutional ownership. Our findings are robust when controlling for valuation uncertainties of low-priced stocks, including idiosyncratic volatility and firm age.

Volume Number

71

Issue Number

6

First Page

5204

Last Page

5229

DOI

10.1287/mnsc.2023.03549

Recommended Citation

Caglayan, Mustafa O.; Duarte, Diogo; Duarte, Victor F.; and Lu, Xiaomeng, "Compounding Money and Nominal Price Illusions" (2025). Faculty and Staff Works. 896.
https://kb.gcsu.edu/fac-staff/896