Asian Journal of Economics, Business and Accounting

This paper investigates the primary determinants of stock returns on the Pakistan Stock Exchange (PSX), a key frontier market. Using a panel dataset of 15 large-cap stocks from 2011 to 2022, we test for the pricing of microstructure frictions (illiquidity, information asymmetry) and classic risk (total volatility). Our panel regression models show no statistically significant premium for illiquidity or information asymmetry. Instead, past total volatility emerges as the sole robust and significant determinant of returns, with a positive coefficient of 0.951 (t-stat = 2.91). This finding directly challenges the low-volatility anomaly documented in developed markets and affirms the classic risk-return paradigm in a high-uncertainty environment. For investors, our results imply that managing total volatility is more critical than managing liquidity risk for large-cap Pakistani stocks, while for policymakers, it highlights the importance of macroeconomic stability in lowering the cost of capital.