Liquidity and Asset Pricing Model Evidence from Pakistan Equity Market

Abstract

The theme of this study is to examine the role of liquidity via approaching various asset pricing models in the Pakistan equity market. The liquidity of the firm is measure by the share turnover. This study follows Fama and French three factors approach to construct three factors i.e. size, value and liquidity. The sample size consists of 298 firms from non-financial industries listed on PSX and consider monthly data from 2001 to 2015 for empirical investigation. By testing four various asset pricing models, this study conclude that four factor asset pricing models better describe the variations in portfolios. The result of the study confirms the significant contribution of liquidity factor in given asset pricing models. Therefore, the academician and practitioner both should consider the liquidity as a significant indicator for estimating the security prices in Pakistan equity market.