Amihud Illiquidity Shock
factor.formula
The calculation formula of Amihud illiquidity impact factor is as follows:
in:
- :
is the Amihud illiquidity factor of stock i in month t. Amihud illiquidity factor ($ILLIQ_{i,t}$) is usually defined as the average ratio of daily absolute return to daily trading volume of stock i in month t. Its formula is: $ILLIQ_{i,t} = \frac{1}{D} \sum_{d=1}^{D} \frac{|R_{i,d}|}{V_{i,d}}$, where $R_{i,d}$ represents the return of stock i on the dth day of month t, $V_{i,d}$ represents the trading volume of stock i on the dth day of month t (usually measured in amount or number of shares), and D represents the total number of trading days in month t. The higher the value, the worse the liquidity of the stock.
- :
is the average value of the Amihud illiquidity factor of stock i in the past 12 months. It is calculated by summing the Amihud illiquidity factor ($ILLIQ_{i,m}$) of stock i in each of the 12 months from t-12 to t-1, and then dividing by 12. The formula is: $AVGILLIQ_{i,t-12,t-1} = \frac{1}{12} \sum_{m=t-12}^{t-1} ILLIQ_{i,m}$. This value reflects the average liquidity level of the stock in the past year.
factor.explanation
The Amihud Illiquidity Shock Factor (LIQU) is calculated as the current Amihud Illiquidity Factor minus the average of the Amihud Illiquidity Factors over the past 12 months, with a negative sign. The core idea of this factor is that when the liquidity shock is negative (i.e., $LIQU_{i,t}$ is negative), it means that the current illiquidity level is higher than the average level of the past year, that is, market liquidity is declining, and investors will demand a higher risk premium, so that the future returns of stocks may rise. Conversely, when the liquidity shock is positive (i.e., $LIQU_{i,t}$ is positive), it means that the current illiquidity level is lower than the average level of the past year, that is, market liquidity is rising, and the liquidity risk borne by investors is reduced, which may lead to a decline in the future returns of assets. Therefore, this factor can be used to capture potential investment opportunities brought about by changes in liquidity. In addition, due to the market's insufficient response to liquidity shocks, prices often fail to fully reflect the impact of liquidity changes in the short term, which also provides opportunities for using this factor to build quantitative trading strategies. It should be noted that this factor has a reversal nature, that is, when the liquidity shock is negative, the expected future returns of stocks are positive, and vice versa.