Bid-ask spread and stock return behavior: An empirical investigation of the Taiwan stock market

Chi-Jeng Wang, University of Rhode Island

Abstract

This study contains three sections which focus on the bid-ask spread and return behavior on the Taiwan Stock Exchange (TSE)--an order-driven call market without market-makers. In the first essay section, I examine the difference between the quoted and the effective spread, the quoted spread components, and the spread determinants in a market without market-makers (on the TSE). I find that transaction prices occurred mostly at either the posted ask or bid price. More specifically, the quoted and the effective spread closely resemble each other on the TSE, with respect to both the size and the correlation. In the second essay section, I examine the intraday variation in trading volume, return volatility, and bid-ask spreads for stocks traded on the TSE. On the TSE, there exists a U-shaped intraday pattern in the trading volume, as found in continuous markets with a market-maker. Unlike a continuous market, the return volatility is highest around the market open and lowest around the market close. While a U-shaped intraday pattern in bid-ask spreads exists, this pattern is more prevalent in the "low" subgroups in our sample, i.e., the bid-ask spread widens as trading volume and return volatility increase. Interestingly, the bid-ask spread for high market capitalization and high trading frequency stocks is flat throughout the trading day. This behavior is consistent with the hypothesis of the strategic informed trading with heterogeneous information. In the third essay section, I studied stock return behavior on the TSE. I show that, in a call market, bid-ask errors can induce two types of measurement errors: (1) the bid-ask bounce; and (2) the spread size error. Each of these errors is likely to cause negative autocorrelation in the observed returns. ^

Subject Area

Economics, Finance

Recommended Citation

Chi-Jeng Wang, "Bid-ask spread and stock return behavior: An empirical investigation of the Taiwan stock market" (1996). Dissertations and Master's Theses (Campus Access). Paper AAI9723576.
http://digitalcommons.uri.edu/dissertations/AAI9723576

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