| In financial market, informed investors with private information about assets value would like trading according to their own information, and their trading activity will transfer information of assets value to the market. The probability of informed trading can act as the proxy variable of the scale of asymmetric trading information. Most of the previous researches were based on quote driven market with risk-neutrality market makers existing. Then the author used the model of Handa, Schwartz and Tiwari (2003) which is built on order driven market. As an extension of HST model, we show that the size of the spread is a function of the differences in valuation among investors and of probability of informed trading.Firstly, the background knowledge of Ask-Bid Spread and probability of informed trading will be introduced, including trade cost and model of Ask-Bid Spread.Secondly, Handa, Schwartz and Tiwari (2003) method which is built on order driven market will be improved creatively. We show that the size of the spread is a function of the differences in valuation among investors and of probability of informed trading.Thirdly, we test the model using transaction data on individual stocks in the Shanghai index. Both GMM estimation of the model parameters and empirical evidence on spread behavior as the relative proportion of buyers and sellers in the market changes, provide strong support for the model. The empirical results also show that there isn' t close relationship between trading activity and informed trading, and strong relationship between spread and informed trading.Moreover the intra-day character of both probability of informed trading and Bid-Ask spread is reverse J shape. At last, some suggestions based on the conclusions were given. |
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