China's Stock Bid-ask Spread, Cross-market Empirical Research

Bid-ask spread is a good proxy to measure trade execution costs. The issue of trading costs from the point of view of spread in equity markets has long been a focus of market microstructure research. There is surprisingly little genuine spread research on emerging markets or markets adopting automated trading system in the form of electric limit order book. China is one of the largest emerging markets in the world that adopts the limit order trading mechanism. In addition to the complicated ownership structure - a consequence a transitional economy - Chinese firms also actively seek to list and raise funds from a variety of overseas markets. Chinese stocks are being listed and trading both on oversea exchanges (ADRs, H-shares, and red-chips) and on the domestic exchanges (A-shares and B-shares). Despite the fact that china stock market are characterized by a number of such important features, there has not yet been a systematic study simultaneously comparing the trading costs or spread on these different stock markets. This research provides a comprehensive study on bid-ask spreads, spread components, and their determinants for Chinese stocks listed on domestic and international exchanges. Our research makes an important contribution to academic research and practical guidance.We find that domestic investors trading A- and B-shares inside China face lower bid-ask effective spreads than foreign investors trading ADRs in New York or trading H-shares and red-chips in Hong Kong. The wider effective spreads on international exchanges can be attributed to both a higher degree of information asymmetry (price impact) and higher revenues (realized spread) collected by liquidity suppliers.The cross-sectional patterns of spread and spread components indicate that higher effective spreads associated with large, active, and low-return-volatility stocks can be mainly attributed to smaller price impact, which reflects the impact of information asymmetry more than the economies of scale in execution costs. We examine the intraday pattern spreads and spread components for our sample of A-shares. The intraday pattern in the effective spread of China stock market exhibit the unique L-shape one. The higher effective spreads in the morning essentially level off as the trading hours elapse during the rest of the day. The intraday price impacts exhibit the familiar U-shaped pattern, except during the last two 15-minute intervals. The...