Intraday pattern in bid-ask spreads and its power-law relaxation for Chinese A-share stocks

TL;DR

This study analyzes high-frequency data of Chinese A-share stocks, revealing intraday bid-ask spread patterns with power-law relaxation, and provides insights into the endogenous information accumulation process affecting spreads.

Contribution

It uncovers the power-law relaxation behavior of bid-ask spreads within the first hour of trading and characterizes the distribution of relaxation exponents for individual stocks.

Findings

Intraday spreads exhibit an L-shaped pattern with fine structure.

Spreads relax as a power law with exponents around 0.18-0.19.

Relaxation exponents are roughly normally distributed.

Abstract

We use high-frequency data of 1364 Chinese A-share stocks traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange to investigate the intraday patterns in the bid-ask spreads. The daily periodicity in the spread time series is confirmed by Lomb analysis and the intraday bid-ask spreads are found to exhibit $L$-shaped pattern with idiosyncratic fine structure. The intraday spread of individual stocks relaxes as a power law within the first hour of the continuous double auction from 9:30AM to 10:30AM with exponents $\beta_{\rm{SHSE}}=0.19\pm0.069$ for the Shanghai market and $\beta_{\rm{SZSE}}=0.18\pm0.067$ for the Shenzhen market. The power-law relaxation exponent $\beta$ of individual stocks is roughly normally distributed. There is evidence showing that the accumulation of information widening the spread is an endogenous process.