This study examines intraday patterns of short sales, margin purchases, adverse selection, and bid-ask spreads in the order-driven market of the Taiwan Stock Exchange (TWSE). We find that both short sales and margin purchases exhibit a U-shaped intraday pattern in the TWSE. We further show that short sales and margin purchases have a significantly positive relationship with adverse selection and bid-ask spreads. We provide evidence that the U-shaped pattern of bid-ask spreads can be explained by short selling and margin trading activities.
Pacific-Basin Finance Journal Available online 18 May 2013