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

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


Rizwan Ahmed

Subhan ullah

Andros Gregoriou


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.


Ahmed, R., ullah, S., Hudson, R., & Gregoriou, A. (in press). The implications of liquidity ratios: Evidence from Pakistan stock exchange limited. Quarterly Review of Economics and Finance,

Journal Article Type Article
Acceptance Date Dec 11, 2020
Online Publication Date Dec 15, 2020
Deposit Date Dec 17, 2020
Publicly Available Date Dec 16, 2022
Journal Quarterly Review of Economics and Finance
Print ISSN 1062-9769
Publisher Elsevier
Peer Reviewed Peer Reviewed
Public URL
Publisher URL


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