Empirical Study On Bid-Ask Spread Of Shanghai Stock Market Based On The Market Microstructure

Market microstructure are finance areas which study price formation and price discovery, market structure and design, information disclosure. This article tries to explore market microstructure characteristics of Shanghai stock market from the angle of bid-ask spread. Research samples are 30 stocks which stochastically select from Shanghai Stock Exchange 180 index. Research periods are from July, 2002 to September, 2002. With high frequency trading data, we apply statistics and econometrics to study intraday and intraweek patterns of bid-ask spread and bid-ask spread components. The aims are to let many investors understand some information about price formation and discovery mechanisms of China stock market, then disclose the modes and characteristics of market microstructure of China stock market. The empirical results show:(l) Bid-ask spread of Shanghai stock market exhibits L-shaped intraday pattern, and quoted depth exhibits M-shaped intraday pattern . From the angle of 10-minute trading session, bid-ask spreads of sequential two trading periods after opening market have statistical and significant differences from the last 10-minute trading session, respectively. From the angle of trading days, bid-ask spread of Monday, Tuesday and Wednesday have no statistical and significant differences from Friday, respectively; but Thursday is statistically significant. (2) After decomposing bid-ask spread through the regression model, we estimate an adverse selection component of 42.19%, a order processing component of 34.23% and a order persistence component of 23.27%. We also find that adverse selection cost increases, order processing cost decreases and order persistence cost fixes when trading volumes rise.