This paper explores the relationship between stock market liquidity and risk by using the information contained in the Open Electronic Limit Order Book (OELOB) of the National Stock Exchange of India. It has been found that there is a statistically significant negative relationship between risk and stock market liquidity, which is measured by the concept of impact cost. The study concludes that there is no significant relationship between liquidity and trading activity in terms of turnover.

Till date a considerable amount of efforts have been made to conduct researches in the area of stock market liquidity. Most of these studies have tried to explain its relationship with the returns at the individual security level. Risk or volatility being an important aspect of investment management has received considerable attention particularly after the development of the theories relating to the capital market, but its association with the liquidity is yet to receive due attention of the researchers, particularly at the aggregate level. Present study, therefore, seeks to address these issues at an aggregate level.

In recent times, most of the stock exchanges have changed their way of operation from floor based trading system to electronic trading system. Most electronic exchanges operate as a form of limit order book. Traders in this type of system instead of trading directly with each other place limit orders in the book. This system ensures a commitment to trade up to the specified quantity of the asset at least as favorable as the specified limit price. The order book translates these commitments into trades using a queuing rule that follows strict price, then time priority. Orders may be executed in one or more trades. Orders can be cancelled at any time.

Applied Finance Journal, Stock Market Liquidity, Aggregate Level, Auto Correlation, Regression Equation, National Association of Securities Dealers Automated Quotations, NASDAQ, Multiple Regression Equation, Open Electronic Limit Order Book, OELOB, Market Liquidity.