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

On the use of the market model R-square as a measure of stock price efficiency 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

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

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Publisher
Springer Journals
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0410-8
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 12, 2013

References

  • Stock price synchronicity and analyst coverage in emerging markets
    Chan, K; Hameed, A
  • Trading costs and price discovery
    Choy, S; Zhang, H
  • Does greater firm-specific return variation mean more or less informed stock pricing?
    Durnev, A; Morck, R; Yeung, B; Zarowin, P

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