On the use of the market model R-square as a measure of stock price efficiency

Riccardo Bramante (), Giovanni Petrella () and Diego Zappa ()

Review of Quantitative Finance and Accounting, 2015, vol. 44, issue 2, 379-391

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. Copyright Springer Science+Business Media New York 2015

Keywords: R-square; Price efficiency; Price discovery; Delay; G14; C12 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11156-013-0410-8

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