Negative return volume-weighted illiquidity
factor.formula
Negative return volume-weighted illiquidity factor ILLIQ:
in:
- :
is the daily return of stock i on day t-k (negative return day). Note that the real return is used here, not the absolute value. The absolute value of the return has been taken in the formula.
- :
It is the daily trading volume of stock i on day t-k (a negative return day), usually expressed in monetary terms.
- :
The number of days in which the daily return rate of stock i is negative within the calculation interval, that is, the number of negative return days.
factor.explanation
The negative return volume-weighted illiquidity factor measures the degree of illiquidity in a stock's trading when its return is negative. This factor is based on the illiquidity indicator proposed by Amihud (2002), but only considers negative return days. Intuitively, when the market is falling, if the stock's trading volume is small relative to the change in its return (i.e., the absolute value of the return/volume is large), the stock is highly illiquid. Highly illiquid stocks generally require higher risk premiums to compensate for their potential trading friction costs. This factor contains elements of market sentiment, because declines are often accompanied by pessimism, resulting in lower liquidity. From a reversal perspective, if a stock has poor liquidity when it is falling, it may indicate a rebound opportunity in the future.