RELATIONSHIP BETWEEN MARKET RISK AND TRADING VOLUME

Abstract

The research examines the relationship among systematic risk and liquidity in the context of Karachi Stock Exchange (KSE) All Index. Systematic risk was measured using Capital Asset Pricing Model (CAPM), while liquidity assessed through trading volumes. A dataset consisting of 340,194 daily share price observations from 467 firms listed on the KSE All Index, covering 32 industries (excluding
Banking, Insurance, and Mutual Funds), was utilized. The KSE 100 Index was used to represent the market return. Additionally, trading volumes of the same firms were analyzed to construct 10 portfolios based on the Fama- French (1993) methodology. The results of the analysis indicate that firms with higher trading volumes tend to have greater systematic risk than firms with lower trading volumes. Moreover, the relationship between systematic risk and liquidity is weaker in firms with lower liquidity.
The findings suggest that including firms with low trading volumes in an investment portfolio could increase exposure to market/systematic risk. This research contributes to a better understanding of how liquidity influences the risk/ return of firms listed on KSE and highlights the possible risks related with investing in less liquid stocks.