Research On Implicit Cost Of Call Auction In Chinese Stock Market

Traditional microstructure market theory shows that call auction has many advantages in dealing with stock trading. How to measure the cost of call auction, how to decompose the components of the bid-ask spread, has been a focus of academic research. This article uses a special method to measure the bid-ask spread in call auction which can compare the effective spreads in continuous auction. Based on this method, I estimate the bid-ask spread of call auction in Chinese stock market. In this paper, the DNR model is used to decompose Chinese call auction bid-ask spread into order process costs and adverse selection costs.This paper demonstrates a significant positive relationship between bid-ask spread and size of order. Regardless of company size, with expansion of order size, bid-ask spread expanded significantly. From the company size, the results showed a negative relationship between call auction bid-ask spread and the size of company.Whatever the size of company and size of the transaction, bid-ask spread in call auction, both the order process costs and adverse selection costs are greater than continuous auction. From the relative terms, the proportion of adverse selection costs in total spread of the call auction mechanism is higher than continuous auction. These results do not comply with the traditional market microstructure theory. The reason, as the paper argues, is due to the serious information asymmetry in China’s stock market and the lack of participation in call auction. According the empirical findings, I think the financial supervisory authorities should strive to implement some policies to control the inside information, to extend the time that call auction accept orders, increase the market threshold, develop institutional investors, strengthen investor education and other policies.The first chapter is an introduction, describes the purpose and meaning of this articles. This chapter includes a review of previous literature. In the second chapter of this paper, I study the nature of the implicit cost and sources of implicit transaction costs. The third chapter is to estimate call auction bid-ask spread in Chinese stock market and use the the DNR model to decompose the bid-ask spread in call auction. Based on the findings of the third chapter, the fourth part of the article analyzes the impact of different trading systems on the market quality. In the last part of this paper, I make some policy advices to the Chinese regulatory authorities based on the results of the study.