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Jinghan Cai, Jia He, Jibao He and Weili Zhai
''Individual Investors and R^2''
( 2019, Vol. 39 No.1 )
Some behavioral view of R^2 in the literature argues that lower R^2 may imply that the prices are less efficient, since lower R^2 may be the results of higher noise trader participation, and therefore the sum of squared errors is higher. This paper uses a novel dataset from Chinese stock market and directly checks the relationship between R^2 and noise trader participation. Cross-sectionally, we find no evidence supporting the negative relationship between R^2 and noise trader participation. Time-series wise, we find a case where R^2 positively comoves with noise trader participation. This paper casts doubt on the prediction that noise trader participation will lower the R^2.
Keywords: individual investor, R^2, trend investor
Manuscript Received : Dec 05 2018 Manuscript Accepted : Feb 02 2019

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