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The implications of liquidity ratios: Evidence from Pakistan stock exchange limited

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  • Ahmed, Rizwan
  • ullah, Subhan
  • Hudson, Robert
  • Gregoriou, Andros

Abstract

In this paper we test two recently developed liquidity measures the Return-to-Turnover (hereafter RtoTR) proposed by Florackis et al. (2011) and Return-to-Volume (hereafter RtoV) recommended by Amihud, 2002, for 386 companies listed on the Pakistani Stock Exchange (PSX). Our data is obtained from January 2005 to December 2019. We firstly show the Amihud, 2002 ratio has limited ability to distinguish illiquidity from size effects in asset pricing. Second, the Florackis et al. (2011) measure has distinct features to overcome the limitations of the Amihud, 2002 ratio in the PSX. Our results show that the Capital Asset Pricing Model cannot completely account for the significant RtoV premium. However, this weak evidence for the existence of this premium disappears when Fama–French or Carhart alphas are considered as measures of risk-adjusted performance. This suggests that the RtoTR price impact ratio is more effective in the PSX compared to the RtoV ratio. Our findings suggest that both trading frequency and trading cost are significant factors in examining the returns. The RtoV ratio has a negative correlation with the market capitalization, which suggests that small stocks are inherently illiquid.

Suggested Citation

  • Ahmed, Rizwan & ullah, Subhan & Hudson, Robert & Gregoriou, Andros, 2023. "The implications of liquidity ratios: Evidence from Pakistan stock exchange limited," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 235-243.
    • Handle: RePEc:eee:quaeco:v:87:y:2023:i:c:p:235-243
    DOI: 10.1016/j.qref.2020.12.006
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    More about this item

    Keywords

    Asset pricing; Illiquidity; Price impact ratio; Emerging markets;
    All these keywords.

    JEL classification:

    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G1 - Financial Economics - - General Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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