Liquidity shock
factor.formula
The calculation formula of liquidity shock factor is as follows:
The meaning of each parameter in the formula is as follows:
- :
Amihud's illiquidity measure for stock i at time t (e.g., month t). The larger the value, the higher the illiquidity of the stock, that is, the higher the impact cost required to buy and sell the stock, and the lower the market depth.
- :
The average of the Amihud illiquidity measure values for stock i over the past 12 time units (e.g., the past 12 months). This value represents the average illiquidity level of the stock over the past period of time.
factor.explanation
The factor measures liquidity shocks by calculating the difference between current Amihud illiquidity and the average illiquidity over the past 12 months. The negative sign is introduced to reflect the negative correlation between liquidity and expected returns: when liquidity decreases (Amihud illiquidity increases), the factor value is positive, indicating higher returns in the future; conversely, when liquidity increases (Amihud illiquidity decreases), the factor value is negative, indicating lower returns in the future. This inverse relationship reflects investors' risk compensation requirements for illiquid assets and the lag in the market's response to liquidity changes.