Adverse selection costs: A study on the Chinese stock market

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.     

中国股市的买卖价差成分

本文基于市场微观结构理论,采用HS模型分解了上证50指数成分股票的买卖价差成分。通过对每分钟的分笔交易数据的实证分析,我们发现上海股市的交易价差约为0.065%,在不考虑交易相关时,买卖价差的指令处理成本和逆选择成本分别为29%和71%,而在考虑交易相关之后,买卖价差分解为指令处理成本、逆选择成本和指令持续成本,它们对买卖价差的贡献度分别为11%,40%和49%,而且交易反转概率低于0.5。此外,我们还发现上海股市中高价股或高交易量股票的逆选择成本最小。     

Sharing contracts' marginalisation,adverse selection and markup calculation

This paper proposes a new approach to explain the dominance—in the Islamic banking market—of markup contracts at the expense of sharing ones. We show that the dual pricing practised in this market produces an additional—or artificial—dimension of adverse selection, which is causing the sharing contracts' marginalization. We suggest specialized use of two Islamic contractual categories as a device for eliminating artificial adverse selection. We suggest also an endogenous calculation of the markup, that is independent of the interest rate, based on the financing cost unification. This approach allows the deduction of default and liquidity risk premiums.     

Call Auction Transparency and Market Liquidity: Evidence from China

This paper uses the natural experiment offered by the Shanghai Stock Exchange to investigate the impact of opening call auction transparency on market liquidity. We find that the dissemination of indicative trade information during the pre‐open call auction session leads to an overall improvement in stock liquidity in the continuous trading session. Bid‐ask spreads narrow in the first trading hour because adverse selection risk fell significantly and there is less price volatility in the continuous market. This effect is greater for actively traded securities than illiquid securities. Our findings are robust for different lengths of sample period, different lengths of trading hours after market open, and stocks that had (and had not) reformed the share split structure during our research period.     

Market integration in developed and emerging markets: Evidence from the CAPM

Beta, as measured by the Capital Asset Pricing Model (CAPM), is widely used for pricing stocks, determining the cost of capital, and gauging the extent to which markets are integrated. The CAPM model assumes that equilibrium conditions prevail. The choice of which market portfolio to use in the regression – the home country or global index – depends on the level of global market integration. We present several new empirical observations on the pricing of stocks and market integration. We provide guidance on how practitioners should calculate beta on securities in various developed and emerging markets.     

Informed trading in the index option market: The case of KOSPI 200 options

This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse‐selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse‐selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one‐third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse‐selection costs are positively related with option delta. Our regression analysis shows that option‐related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118–1146, 2008     

沪港通的绩效增长与反向选择效应——兼论实现高质量增长的资本市场改革路径

本文从金融服务实体企业角度探讨了沪港通对“成分股”绩效增长是否存在激励效应和治理效应,以及沪港通的成分股“选择机制”是否存在“反向选择效应”,并综合运用线性调整、逆概率加权、内生处理效应、异质性处理效应等估计方法,得出如下结论:(1)“沪港通”政策的实施有助于提升成分股企业的绩效水平;(2)沪港通持股水平高更有助于提升企业绩效水平,表明沪港通持股存在治理效应;(3)政策实施过程存在潜在的福利损失——那些在“沪港通”中受益水平较低的企业更大概率地被选入成分股,从而降低了开放政策所能达到的最优福利水平。这表明以“试点”方式进行资本市场开放,会产生因“反向选择”而导致的福利损失。因此,需要加强改革的“强度”和“广度”,适时提升“沪港通”交易份额,并扩大沪港通成分股范围,以提高微观企业增长水平及增长质量。     

中国股票市场交易成本的估计

采用上证180指数成分股票的分笔交易数据,分析估计了反映中国股票市场交易成本的报价价差、有效价差和交易价差,并对它们进行了比较和相关分析。实证结果表明,我国股票市场的总交易成本约为0.25%,除指令处理成分外,还有其他的交易成本成分,而且它们会随时间的变化而增加。交易成本不仅表现出共同变动的趋势,而且还与股票的特征有关。     

Market Quality around Macroeconomic News Announcements: Evidence from the US and Canadian Markets

We investigate changes in market quality in the US and Canada during macroeconomic news announcements. We measure market quality in terms of returns dependence, the cost of trading, and pricing errors. Using a sample of cross‐listed stocks and macroeconomic news from both countries, we document that market quality is generally higher in the US than in Canada. The pattern of intraday serial dependence in returns reveals that it takes investors about 5 min less to react to order imbalances in the US than in Canada. We further observe that, around announcement periods, transaction costs increase more in Canada than in the US, suggesting that the US market offers better liquidity. More information is also incorporated into the US market. These results support the view that the US is a prime target for cross‐listing, and are robust to different types of assets and time specifications.     

Are stocks dumped or neglected by analysts' inferior investments to covered stocks?

We compare the long-term stock price and operating performance of firms that are followed by analysts to those that are not over the period of 1994-2005. While analysts are skillful in identifying quality firms for coverage, the market is efficient in pricing both covered and neglected stocks such that risk-adjusted stock returns are compatible between the two groups. However, dumped stocks consistently outperform covered stocks with significant risk-adjusted returns across different market conditions and regulatory environments. Hence, investors might earn better returns by investing in dumped stocks, but the higher returns may represent compensation for greater search costs and information risk associated with investing in these stocks.     

订单驱动机制下买卖价差构成分析——兼论以买卖价差度量流动性的可靠性

买卖价差是金融市场微观结构理论研究的重要组成部分。在报价驱动交易机制下,买卖价差由指令处理成本、存货成本和非对称信息成本构成。而在订单驱动交易机制下,若不考虑订单处理成本,买卖价差则主要取决于投资者对资产预期价值的差异、买卖双方投资者间的比例和逆向选择成本。经研究发现,买卖价差随投资者对资产预期与逆向选择成本的增加而增加,当买卖双方力量对比相当时,买卖价差达到最大;而在单边买方或卖方市场,买卖价差则达到最小,这一点与通常对流动性的理解是相矛盾的。由此,在订单驱动机制下,以买卖价差作为流动性度量指标是不可靠的。     

中间人、转口贸易与加工装配活动关系研究——基于香港与内地的经验

内地加工装配活动对香港中间人的依赖有其历史原因,也与加工产品进出口市场存在不对称信息有关.中间人理论认为,只有存在不对称信息和逆向选择的市场才需要中间人,中间人必须具备鉴定产品质量的资格和能力,必须有良好的信誉、较低的交易成本并能够提高交易效率.通过对香港转口内地产品所进行的实证研究表明,信息不对称、进口方的GDP、内地与有关经济体政治关系等是影响香港中间人地位的主要因素.分析表明,内地对外贸易的发展可以增进市场信息的流动,减轻对中间人的依赖,但信息不对称和逆向选择问题仍将存在,内地开展的加工装配活动仍离不开中间人.     

International market selection and subsidiary performance: A neural network approach

How should multinational enterprises (MNEs) select international markets? We develop a model of international market selection that adds firm-specific advantages and transaction cost considerations to previously explored target market factors based on Dunning's Eclectic Framework. Results obtained using neural network (NN) analysis indicates that our model has strong predictive power in explaining international market selection. Further tests show that firms selecting international markets predicted by the model reported significantly higher subsidiary performance relative to firms whose investments were not predicted by the model. Our results provide strong initial evidence that a firm-level strategic approach to international market selection facilitates MNE success.     

Financial market liberalization and the pricing of idiosyncratic risk

We test the impact of idiosyncratic risk on stock returns for emerging markets that experience financial market liberalizations. Idiosyncratic risk is positively associated with returns prior to financial market liberalization, but liberalization diminishes this effect. Moreover, prior to liberalization, the number (concentration) of stocks available in the market is negatively (positively) correlated with the pricing of idiosyncratic risk. The decrease in the pricing of idiosyncratic risk can explain the reduction in the cost of capital around liberalizations. Additionally, the change in the pricing of idiosyncratic risk may be a useful measure of the success of financial market liberalization.     

Show me the money: Option moneyness concentration and future stock returns

Informed traders often use options that are not in-the-money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume-weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross-sectionally and at the portfolio level yielding a Fama–French five-factor α of 12% per year for all stocks and 33% per year for high implied volatility stocks.     

逆向选择视角下电子商务市场与传统市场间关系研究

电子商务的出现和快速成长反映出它对信息环境具有支配性的优点,这本身就意味着电子商务市场可能成为传统市场的替代。然而,逆向选择问题明显限制了这种替代效应程度。文章基于经典逆向选择模型,通过所构造的双市场(传统市场与电子商务市场)逆向选择模型,证明伴随着质量不确定性而诱发的逆向选择问题,在电子市场和传统市场之间会产生市场的不均衡,从而导致渠道冲突。文章试图揭示传统市场和电子商务市场并存的学理根源,得出两市场间市场细分的条件,对两市场间的渠道冲突提出新的解释,并据此提出了逆向选择下企业营销的策略建议。     

Dynamic interdependence of ASEAN5 with G5 stock markets

We find ASEAN5 and G5 stock markets are weakly linked in normal conditions. ASEAN5 markets became more connected with G5 markets during global financial crisis, with stronger conditional correlations, a higher level of risk spillover-connectedness and intensive causal risk dependence. By implications, ASEAN5 stocks are both return enhancers and risk diversifiers in boom market conditions. The diversification benefits remain even during crisis times, albeit lesser. Over the longer term, the diversification benefits of a portfolio that includes both ASEAN5 and G5 stocks are recaptured as market linkages revert to some lower levels due to decreased crisis contagion.     

Order imbalance and the dynamics of index and futures prices

This study uses transaction records of index futures and index stocks, with bid/ask price quotes, to examine the impact of stock market order imbalance on the dynamic behavior of index futures and cash index prices. Spurious correlation in the index is purged by using an estimate of the “true” index with highly synchronous and active quotes of individual stocks. A smooth transition autoregressive error correction model is used to describe the nonlinear dynamics of the index and futures prices. Order imbalance in the cash stock market is found to affect significantly the error correction dynamics of index and futures prices. Order imbalance impedes error correction particularly when the market impact of order imbalance works against the error correction force of the cash index, explaining why real potential arbitrage opportunities may persist over time. Incorporating order imbalance in the framework significantly improves its explanatory power. The findings indicate that a stock market microstructure that allows a quick resolution of order imbalance promotes dynamic arbitrage efficiency between futures and underlying stocks. The results also suggest that the unloading of cash stocks by portfolio managers in a falling market situation aggravates the price decline and increases the real cost of hedging with futures. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1129–1157, 2007     

Machine learning and the cross-section of emerging market stock returns

This paper compares various machine learning models to predict the cross-section of emerging market stock returns. We document that allowing for non-linearities and interactions leads to economically and statistically superior out-of-sample returns compared to traditional linear models. Although we find that both linear and machine learning models show higher predictability for stocks associated with higher limits to arbitrage, we also show that this effect is less pronounced for non-linear models. Furthermore, significant net returns can be achieved when accounting for transaction costs, short-selling constraints, and limiting our investment universe to big stocks only.     

Myopic Selection

The severity of selection mechanisms and the myopia of selection are explored through a duopoly model where one firm tries to move down a learning curve in which costs are initially higher than its rival's but ultimately much lower. A trade‐off is found between catch‐up time and asymptotic market share: the more severe are selection pressures, the less likely is it that the learning technology will survive; however, if it does survive, the learning technology will in the limit be more competitive the more severe are selection pressures. We explore the dynamics of the model under unit cost and strategic pricing and find that the optimal pricing rule depends on the parameters governing firm learning and market selection.