THE RELATIONSHIP BETWEEN STOCK LIQUIDITY AND STOCK RETURNS (EVIDENCE FROM THE PAKISTAN STOCK EXCHANGE)

Abstract

The purpose of the proposed study is to find out the association between the stock liquidity and stock returns within the Pakistan Stock Exchange, focusing on firms in the textile sector and utilizing a quantitative research approach. The study examines secondary data from 41 listed firms from January 1, 2014, to June 26, 2024. This study espouses a panel data tactic to explore the influences of skewness and kurtosis of stock returns, stock price, firm size, and stock return volatility on stock liquidity. The turnover ratio, projected by Datar
et al. (1998), is employed as a degree of liquidity owed to its efficiency and data availability. Stock returns are restrained by kurtosis and skewness to apprehension the distributional features of returns. The consequences signify a noteworthy association among stock returns and stock liquidity. Indeed, stocks with higher skewness and kurtosis of returns incline to parade increased liquidity, reflecting a predilection for stocks with hypothetically higher returns and extreme return designs. A negative connexion between stock price and liquidity proposes that higher-priced stocks have lower liquidity, likely due to reduced availability for trading. Conversely, larger
firms display higher liquidity, accredited to their greater market existence and investor sureness. Moreover, lower volatility in stock returns associates with higher liquidity, prominence the constancy within the segment. This research highpoints a profounder and stronger considerate for investors, portfolio managers, risk managers, and policymakers. Investors can leverage this knowledge to construct well-diversified portfolios that balance risk and return. Portfolio managers can optimize investment strategies by allocating capital to assets with desired liquidity characteristics. Risk managers can develop robust frameworks to capture potential price
fluctuations, while financial institutions can accurately price financial securities. Policymakers can formulate regulations to enhance market liquidity and stability. Overall, this research directs to a deeper understanding of the dynamics between stock returns and liquidity in an emerging market context, offering practical implications for enhancing financial decision-making and market efficiency.