Python for Finance - Second Edition

Estimating Amihud's illiquidity

According to Amihud (2002), liquidity reflects the impact of order flow on price. His illiquidity measure is defined as follows:

Here, illiq(t) is the Amihud's illiquidity measure for month t, Ri is the daily return at day i, Pi is the closing price at i, and Vi is the daily dollar trading volume at i. Since the illiquidity is the reciprocal of liquidity, the lower the illiquidity value, the higher the liquidity of the underlying security. First, let's look at an item-by-item division:

>>>x=np.array([1,2,3],dtype='float') 
>>>y=np.array([2,2,4],dtype='float') 
>>>np.divide(x,y) 
array([ 0.5 , 1. , 0.75]) 
>>>

In the following ...