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Title The Impact of Liquidity on Stock Returns Listed on Pakistan Stock Exchange

Author(s) Usman Zareef

Abstract Liquidity has been recognized to influence stock returns because of its significance to the investor, financial markets and listed companies. Even though sufficient literature have been recorded the relationship between liquidity and daily stocks returns. However, the documented results of this relationship are mixed. This may be because of the reasons that liquidity has many dimensions and proxies for its measurement. The main aim of this study is to investigate the liquidity with reference to stock returns, to measure the liquidity in a scientific method of share Turnover ratio, Volume and ILLIQ measures and to find out the relationship between liquidity and daily stocks returns in Pakistan. Three separate models are used for the turnover, volume and ILLIQ, the proxies of liquidity. Ln Size, Ln book-to-market and portfolio betas are taken as control variables with each proxy. In order to achieve this aim, daily data of 50 firms listed on Pakistan stock exchange for the period of January 2009 to December 2017 is utilized as a sample. The insight of this study is, there is a negative relationship between liquidity (turnover, volume and ILLIQ) and daily stocks returns. investors would need a higher rate of returns for holding illiquid stocks in their hands. Two models Fixed effect and random effect, used for the panel data, are tested. After that other tests are organized to find out which model is suitable for the analysis. The outcomes reveal that the fixed effect model is appropriate for the analysis. Heteroskedasticity and autocorrelation assumptions are attached with the fixed effect model therefore, FGLS model is used for the analysis to handle these issues. The outcomes obtained from the FGLS models for all the turnover, volume and ILLIQ proxies revealed that turnover (liquidity) is statistically and positively correlated with daily stocks returns. in addition, volume (liquidity) is statistically and positively correlated with daily stocks returns and ILLIQ (liquidity) also revealed the statistically positive correlation with daily stock stocks returns.

Type Thesis/Dissertation MS

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2018-11-30

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