Amihud Illiquidity: Pricing Information Beyond Trading Volume

Summary

This review examines whether Amihud’s ILLIQ measure captures information about stock illiquidity beyond IDVOL, the average inverse of trading volume. It describes a decomposition that isolates a residual component tied to the relationship between absolute returns and trading volume, including volume variability. The reviewed study tests how these measures relate to expected cross-sectional returns and realized market returns, using historical US stock data from 1955 to 2016.

The reported evidence is that the residual information in ILLIQ remains positively associated with expected returns after controlling for IDVOL and several other factors, including mispricing and sentiment. Market-level ILLIQ shocks also relate negatively to contemporaneous realized returns, with more consistent results than market IDVOL shocks. The review argues that illiquidity is multidimensional and no single proxy captures every aspect. Its findings come from historical research and model specifications, so they do not establish that the measures will forecast returns in other markets or periods.

Key ideas

• ILLIQ contains illiquidity-related information beyond the inverse-volume measure IDVOL.
• The residual component of ILLIQ is reported to predict cross-sectional expected stock returns after controls.
• Market ILLIQ shocks are more consistently related to realized returns than market IDVOL shocks.
• The reviewed findings use historical US data and depend on the study’s measurement and regression choices.
• Illiquidity is multidimensional, so a single proxy cannot represent every relevant trading cost or risk.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.