The R-square of the market model is a very popular measure of stock price efficiency. However, its interpretation is far from being unambiguous. Some scholars argue that the R-square is a direct measure of efficiency, others argue that the R-square is an indirect measure of efficiency. This paper contributes to the literature in two ways. First, we model the relationship between the market model R-square and the delay in the price discovery process and, second, we find that the correlation between R-square and delay is consistently negative. We conclude that the R-square is a direct measure of price efficiency.
Bramante, R., Petrella, G., Zappa, D., On the use of the market model R-square as a measure of stock price efficiency, <<REVIEW OF QUANTITATIVE FINANCE AND ACCOUNTING>>, 2015; 44 (2): 379-391. [doi:10.1007/s11156-013-0410-8] [http://hdl.handle.net/10807/67197]
On the use of the market model R-square as a measure of stock price efficiency
Bramante, Riccardo;Petrella, Giovanni;Zappa, Diego
2015
Abstract
The R-square of the market model is a very popular measure of stock price efficiency. However, its interpretation is far from being unambiguous. Some scholars argue that the R-square is a direct measure of efficiency, others argue that the R-square is an indirect measure of efficiency. This paper contributes to the literature in two ways. First, we model the relationship between the market model R-square and the delay in the price discovery process and, second, we find that the correlation between R-square and delay is consistently negative. We conclude that the R-square is a direct measure of price efficiency.
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