Abstract
The study investigates the existence of liquidity premiums and the relationship between liquidity and equity returns in Pakistan. We estimate stock liquidity using three different mea_x0002_sures: stock turnover, illiquidity cost following Amihud (2002), and liquidity beta following Pastor and Stambaugh (2003). For the non-financial firms listed on Pakistan Stock Exchange, we conduct asset pricing tests including liquidity factor in addition to the well-known factors of market, size, book-to-market and momentum. We report significant market, size, BM, momen_x0002_tum, and liquidity premiums in Pakistan’s equity market. Further, the relationship between liquidity factor and stock returns is not consistent for the different liquidity measures used. We document a positive relationship between stock turnover and returns; however, a negative relationship between liquidity and returns is confirmed using the Amihud illiquidity cost and Pastor and Stambaugh liquidity beta