Bid-Ask Spread Disparity between the Domestic and Foreign Shares in the Chinese Stock Markets　

Yea-Mow Chen

Email: ymchen@sfsu.edu

and

Yan He

Email: yhe@sfsu.edu

This paper finds that the average bid-ask spread is significantly higher for the foreign shares (B shares) than the domestic shares (A shares) traded in the Chinese stock markets. To explain the spread disparity between the A and B shares, we estimate the informed trading cost for each stock by using daily data. A new measure for the informed trading cost is developed based on the model of George, Kaul, and Nimalendran (1991). It is found that the B-share market in China contains higher informed trading cost than the A-share market. After controlling for the informed trading cost and return volatility, the bid-ask spread disparity between the A and B shares disappears. Overall, our results suggest that the higher bid-ask spread in the B-share market can be attributed to the higher informed trading cost.