Liquidity and Systematic Risk: Evidence from Pakistan Stock Exchange (PSX)
Keywords:Capital Asset Pricing Model, Systematic Risk, Liquidity, Pakistan Stock Exchange
The study develops and examines the relationship of the liquidity based ten portfolios with systematic risk using the daily data of 467 non-financial firms in Pakistan between 2014-2018. The study calculated the systematic risk using the Capital Asset Pricing Model (CAPM) whereas, the liquidity of the stock was calculated based on trade volume. Ten liquidity portfolios were constructed using Fama McBeth approach to test the relationship between risk premium and firm returns. The study finds the significant impact of risk premium on firm returns in highly liquid stocks. However, the low liquidated stocks had insignificant role of risk premium on firm returns. The study further suggests that the firms which have low volume of trading in the portfolios are prone to market/systematic risk
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