Amihud Illiquidity Indicator
factor.formula
Amihud Illiquidity Index (ILLIQ):
in:
- :
is the Amihud illiquidity index of stock i in month t.
- :
is the return of stock i on the dth trading day in month t.
- :
is the trading volume of stock i on the dth trading day in month t (usually expressed in monetary units).
- :
The total number of valid trading days for stock i in month t. Usually, the number of valid trading days in a month is required to be no less than 15 days.
factor.explanation
The Amihud illiquidity indicator is designed to capture the market impact cost, that is, the price change of an asset caused by a unit of trading volume. The indicator is based on a core assumption: the price of an asset with poor liquidity is more sensitive to fluctuations in trading volume. Therefore, the higher the value of the indicator, the greater the trading volume required to drive the price change of the asset, reflecting higher liquidity risk. Investors will require higher expected returns as risk compensation, thereby generating a liquidity premium. This indicator is often used in risk modeling and stock selection strategies in quantitative investment.