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.
Original languageEnglish
Pages (from-to)379-391
Number of pages13
JournalReview of Quantitative Finance and Accounting
Volume44
DOIs
Publication statusPublished - 2015

Keywords

  • Price discovery
  • Price efficiency
  • R-square

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