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.