Risk, return and trading volume relationship in an emerging stock market: a case study of Karachi stock exchange

The paper determines the empirical relationship between risk, return and trading volume in the Karachi Stock Exchange (KSE) using the GARCH-M technique, and data for the time period December 1991 to December 2010. The paper contributes by introducing the trading volume as a proxy for the flow of information to explain the return in Pakistan’s stock exchange. Such information affects, at the same time, risk and return. The work considers a long time period, based on daily data. This study attempts to incorporate the changing settlement period during the study period. Results show that daily return volatility is time-varying and highly persistent. Contemporaneous changes in trading volume have a positive effect on returns. The previous day’s change in trading volume affects the conditional volatility of returns positively. Therefore, trading volumes have positive information content in predicting returns in all settlement periods except settlement period T+2. Moreover, as settlement period reduced, the day of the week anomalies disappeared, as identified by Nishat and Mustafa (2002). If settlement period T+1 is introduced, we expect that weekdays anomalies will disappear.