Empirical Study On Bid-Ask Spread Of Chinese Stock Exchanges

Financial market microstructure mainly studies the decision-making process of price under established trading system, while the bid-ask spread as the core indicator of market liquidity has become an important sub-field of financial market microstructure research. Liquidity is the most important feature of the stock market, which has the fundamental significance to the existence of the market. Although there are many indicators to measure the liquidity and scholars prefer different indicators, quoted spread is widely recognized as the most important liquidity indicator. To some extent, the study of bid-ask spread represents the study of market liquidity.This paper, based on financial market microstructure theory, uses a whole trading-year high-frequency data of Shanghai and Shenzhen Stock Exchanges. Meanwhile, we select representative stocks of the both stock exchanges and compare the composition differences of the two stock exchanges. LSB model is firstly used to decompose the effective spread to three parts:adverse selection cost, processing cost and order persistent cost, while results show that compared with the Shenzhen Stock Exchange, Shanghai Stock Exchange has higher adverse selection cost and processing cost and lower order persistent cost. Secondly, we explore the relationship between the components of the effective spread and order size. Our empirical results are significantly different from the studies of domestic scholars: adverse selection cost reaches the maximum at the higher order size, rather than the highest order size. Then we investigate the impact of Split Share Structure Reform (SSSR) which began in2005on the components of spread. Results obtained show that individual stock’s SSSR has different impacts on each exchange. Comparing to Shanghai Stock Exchange, adverse selection cost declines which means information transfers better in Shenzhen Stock Exchange after SSSR. Each component in spread shows dissimilar characteristic in the largest order size, In the trading time, adverse selection cost exhibits U-shaped pattern and processing cost exhibits L-shaped pattern. Meanwhile, order persistence declines over the trading day. For the above reasons, bid-ask spread exhibits L-shaped intra-day pattern. By the comparative analysis of the bid-ask spread components of the Shanghai Stock Exchange and Shenzhen Stock Exchange, this paper more fully reveals the microstructure characteristics of the Chinese stock market, and provides a useful reference to improve China’s security market system.