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

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  • Riccardo Bramante
  • Giovanni Petrella
  • Diego Zappa

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

Suggested Citation

  • Riccardo Bramante & Giovanni Petrella & Diego Zappa, 2015. "On the use of the market model R-square as a measure of stock price efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 379-391, February.
    • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:2:p:379-391
    DOI: 10.1007/s11156-013-0410-8
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    Cited by:

    1. Mehmet F. Dicle, 2019. "Increasing return response to changes in risk," Review of Financial Economics, John Wiley & Sons, vol. 37(1), pages 197-215, January.
    2. Debarati Bhattacharya & Wei-Hsien Li & Gokhan Sonaer, 2017. "Has momentum lost its momentum?," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 191-218, January.
    3. Ailie Charteris & Conrad Alexander Steyn, 2023. "The Bank of Japan’s exchange traded fund purchases: a help or hindrance to market efficiency?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 225-240, May.

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    More about this item

    Keywords

    R-square; Price efficiency; Price discovery; Delay; G14; C12;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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