Liquidity Risk and Asset Pricing in Pakistan Stock Exchange
This paper empirically investigates the impact of liquidity risk on stock returns in Pakistan and determines investors’ attitude under bull and bear market conditions. Specifically, the liquidity adjusted capital asset pricing model(CAPM) is modified by including the interaction between the liquidi...
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| Format: | Article |
| Language: | English |
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Shaheed Zulfikar Ali Bhutto Institute of Science and Technology
2021-06-01
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| Series: | JISR Management and Social Sciences & Economics |
| Subjects: | |
| Online Access: | https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/18 |
| _version_ | 1797846603722129408 |
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| author | Abdul Rashid Asma Aib |
| author_facet | Abdul Rashid Asma Aib |
| author_sort | Abdul Rashid |
| collection | DOAJ |
| description |
This paper empirically investigates the impact of liquidity risk on stock returns in Pakistan and determines investors’ attitude under bull and bear market conditions. Specifically, the liquidity adjusted capital asset pricing model(CAPM) is modified by including the interaction between the liquidity risk and the indicators of bull- and bear-market periods to investigate whether the pricing of liquidity risk differs in both upward and downward market trends. The analysis is carried out for a large panel of Pakistani manufacturing firms listed at the Pakistan Stock Exchange for the period January 2000 – December 2015. We use alternative liquidity risk measures to check the robustness of the liquidity risk effect. We observe that higher liquidity risk yields higher excess stock returns, implying pricing of liquidity risk during the examined period. The results also reveal that the liquidity risk is positively and significantly related to excess returns in the high-liquidity-risk beta portfolios, whereas it is negatively or insignificantly related to excess returns of low-liquidity-risk beta portfolios. The results also provide evidence that stocks affected by liquidity risk yield positive expected returns in both bull and bear market conditions. However, we find significant differences in the pricing of liquidity risk under upward and downward market trends. The robustness check confirms that the findings on the pricing of liquidity risk are not driven by any specific measure of liquidity.
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| first_indexed | 2024-04-09T17:57:39Z |
| format | Article |
| id | doaj.art-267df9b8efce466490cdbd55e063472f |
| institution | Directory Open Access Journal |
| issn | 2616-7476 1998-4162 |
| language | English |
| last_indexed | 2024-04-09T17:57:39Z |
| publishDate | 2021-06-01 |
| publisher | Shaheed Zulfikar Ali Bhutto Institute of Science and Technology |
| record_format | Article |
| series | JISR Management and Social Sciences & Economics |
| spelling | doaj.art-267df9b8efce466490cdbd55e063472f2023-04-14T10:30:02ZengShaheed Zulfikar Ali Bhutto Institute of Science and TechnologyJISR Management and Social Sciences & Economics2616-74761998-41622021-06-0119110.31384/jisrmsse/2021.19.1.4Liquidity Risk and Asset Pricing in Pakistan Stock ExchangeAbdul Rashid0Asma Aib1School of Economics, International Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan.School of Economics, International Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan. This paper empirically investigates the impact of liquidity risk on stock returns in Pakistan and determines investors’ attitude under bull and bear market conditions. Specifically, the liquidity adjusted capital asset pricing model(CAPM) is modified by including the interaction between the liquidity risk and the indicators of bull- and bear-market periods to investigate whether the pricing of liquidity risk differs in both upward and downward market trends. The analysis is carried out for a large panel of Pakistani manufacturing firms listed at the Pakistan Stock Exchange for the period January 2000 – December 2015. We use alternative liquidity risk measures to check the robustness of the liquidity risk effect. We observe that higher liquidity risk yields higher excess stock returns, implying pricing of liquidity risk during the examined period. The results also reveal that the liquidity risk is positively and significantly related to excess returns in the high-liquidity-risk beta portfolios, whereas it is negatively or insignificantly related to excess returns of low-liquidity-risk beta portfolios. The results also provide evidence that stocks affected by liquidity risk yield positive expected returns in both bull and bear market conditions. However, we find significant differences in the pricing of liquidity risk under upward and downward market trends. The robustness check confirms that the findings on the pricing of liquidity risk are not driven by any specific measure of liquidity. https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/18asset pricing modelsbull and bear marketsliquidity riskrisk premiumtransaction cost theory |
| spellingShingle | Abdul Rashid Asma Aib Liquidity Risk and Asset Pricing in Pakistan Stock Exchange JISR Management and Social Sciences & Economics asset pricing models bull and bear markets liquidity risk risk premium transaction cost theory |
| title | Liquidity Risk and Asset Pricing in Pakistan Stock Exchange |
| title_full | Liquidity Risk and Asset Pricing in Pakistan Stock Exchange |
| title_fullStr | Liquidity Risk and Asset Pricing in Pakistan Stock Exchange |
| title_full_unstemmed | Liquidity Risk and Asset Pricing in Pakistan Stock Exchange |
| title_short | Liquidity Risk and Asset Pricing in Pakistan Stock Exchange |
| title_sort | liquidity risk and asset pricing in pakistan stock exchange |
| topic | asset pricing models bull and bear markets liquidity risk risk premium transaction cost theory |
| url | https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/18 |
| work_keys_str_mv | AT abdulrashid liquidityriskandassetpricinginpakistanstockexchange AT asmaaib liquidityriskandassetpricinginpakistanstockexchange |