Illiquidity coefficient of variation
factor.formula
ILLIQ (Amihud's Illiquidity):
Coefficient of variation of illiquidity CVILLIQ:
in:
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The trading amount of stock i at time t, usually expressed as transaction amount (in RMB or other currencies), reflects the market activity at that moment.
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The rate of return of stock i at time t, usually a simple rate of return or a logarithmic rate of return, which represents the magnitude of the change in the stock price at that time.
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The time window for calculating the coefficient of variation is the past 20 trading days. The choice of time window will affect the final result. When choosing, the applicability and timeliness of the factors should be considered.
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The standard deviation of the illiquidity index ILLIQ of stock i within a specified time window measures the volatility of the ILLIQ index within the time window. The larger the standard deviation, the higher the illiquidity volatility, and vice versa.
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The average value of the illiquidity indicator ILLIQ of stock i within the specified time window reflects the average illiquidity level of the stock during the window period.
factor.explanation
The coefficient of variation of illiquidity (CVILLIQ) measures the volatility of a stock's illiquidity index (ILLIQ) over a period of time. A higher CVILLIQ value means that the stock's illiquidity is more volatile, that is, there is a higher uncertainty in the market impact cost (e.g., price fluctuations due to illiquidity) faced when buying or selling the stock. Therefore, investors may require a higher risk premium to compensate for this uncertainty. This indicator can be used to identify stocks whose transaction costs may be unstable, or as an input to measure risk in quantitative models.
Specifically, a higher coefficient of variation of illiquidity may imply the following risks:
- Higher transaction cost uncertainty: The transaction costs faced by investors when buying and selling the stock may be more volatile and difficult to predict.
- Higher price impact risk: Larger transactions may have a significant impact on stock prices, resulting in higher implicit transaction costs.
- Lower liquidity risk: When liquidity is poor, investors may not be able to trade quickly at the desired price, or even be unable to sell the stock.
In general, this factor captures the dynamic changes in stock liquidity risk, reflects the degree of transaction friction in the market, and can serve as an important reference for risk management and stock selection strategies.