Adverse selection costs : A study on the Chinese stock market

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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  • Chengying He
  • Zonghui Lu
  • Xingqiang He
  • Jun Chai

Related Research Unit(s)


Original languageEnglish
Pages (from-to)209-230
Journal / PublicationFrontiers of Business Research in China
Issue number2
Publication statusPublished - 2010


Employing a bid-ask spread model applicable for order-driven market, this paper decomposes the bid-ask spread of Shanghai Stock Exchange (SSE) into adverse selection and order processing cost components to investigate the relationship between the components of bid-ask spread and order size. It examines the impacts of firm size, price, trading activeness, and volatility on adverse selection cost, and explores the intraday pattern of adverse selection costs and informative trading. Results show that adverse selection costs increase with trade scale. However, order processing costs do not exhibit the economies of scale. Stocks of large firms, which are high-priced and actively traded, have relatively low adverse selection costs; stocks with large volatility have relatively high adverse selection costs. Moreover, this paper finds that the adverse selection component of bid-ask spread in the Chinese stock market exhibits an L-shaped intraday pattern, which implies that heavy trading around market opening is dominated by informative trading, while heavy trading near market closing is dominated by liquidity trading. © 2010 Higher Education Press and Springer-Verlag Berlin Heidelberg.

Research Area(s)

  • Adverse selection costs, Bid-ask spread, Informative trading, Liquidity, Order processing costs

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Citation Format(s)

Adverse selection costs: A study on the Chinese stock market. / He, Chengying; Lu, Zonghui; He, Xingqiang et al.
In: Frontiers of Business Research in China, Vol. 4, No. 2, 2010, p. 209-230.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review