A Study On Implicit Transaction Cost In China's Stock Market

Investment performance reflects two factors: (1) the portfolio manager's investment strategies or style, and (2) the trading cost incurred in implementing this investment strategy (Keim, Madhavan, 1997). The components of investment strategy, or style, include the selection of securities to buy or sell, and the timing of these transactions. Trading cost can substantially reduce the notional, or "paper", return to an investment strategy. Consequently, since the innovative researches by Demsetz (1968), the theory of transaction cost has been drawing more and more attention and has become one of the hot topics in the researches in finance theory.This paper makes use of the market microstructure theory to study the implicit transaction cost of Shanghai stock market. Market microstructure theory bases its research on the difference between bid and ask prices. The bid-ask spread is the cost payed by investors market for liquidity and is named implicit transaction cost by Demsetz (1968). However, this cost is unobservable. The reasons that the cost is termed implicit are that the data regarding the bid-ask spread are unavailable to researchers under most circumstances and that, even if the data are available, the bid-ask spread does not always reflects the true transaction costs because the transaction price is not always equal to the bid price or ask price (in some cases the transaction price is exactly equal to the bid price or ask price) or is between the bid price and ask price (but in most cases, the transaction price is between the bid price and ask price). Therefore, Roll (1984) thinks that it is necessary to infer and estimate effective bid-ask spread. Roll calls the estimated effective spread the implicit spread. Even though the implicit spread is not observable, its existence means that investors pay unconsciously for information asymmetry. This thesis follows the concept developed by Roll (1984) and calls the cost developed theoretically implicittransaction cost.In China, the researches on explicit costs of the domestic stock markets have been fruitful, but the researches on implicit transaction costs have just begun. To fill in the blank of this area of researches, this thesis puts emphasis on implicit transaction costs and tries to disclose the microstructure characteristics of domestic stock markets. This thesis not only explores the magnitude and components of implicit transaction costs but also probes into the problems of assets pricing and market efficiency that are brought about by implicit transaction costs. 1 deal with my researches in four levels: first, bid-ask spread in the limit-order books, estimated implicit transaction cost and the relation between them. On this level, this thesis quantifies the implicit transaction cost; second, the characteristics and affecting factors of implicit transaction cost; third, the components of implicit transaction costs and its...