Amihud Illiquidity Ratio (Price Impact)
A classic microstructure econometric measure that calculates the absolute price change per dollar of daily trading volume, measuring liquidity depth.
Authored & Audited by Chartered Financial Analysts (CFA) & Econometric Systems Engineers
Methodology Standard: All mathematical models, statutory STOCK Act disclosures, and execution geometries are continuously audited via automated Kupiec POF backtests and walk-forward RMSE tracking.
The Amihud ratio measures true execution friction, ensuring traders do not mistake high volatility for actionable liquidity.
∑ Mathematical Formulation
\text{ILLIQ}_t = \frac{1}{N} \sum_{d=1}^N \frac{|R_d|}{\text{Volume}_d \times \text{Price}_d}Formula rendered in standardized econometric syntax for automated algorithmic execution.
Detailed Quantitative Explanation
Introduced by Yakov Amihud in 2002, the Amihud illiquidity metric assesses how easily an asset can be absorbed by the market without causing adverse slippage.
A high Amihud ratio indicates an illiquid asset where even modest institutional orders will move the market against the buyer, while a low ratio signifies deep liquidity capable of handling institutional block sweeps.
Unlike simple volume tallies, the Amihud ratio directly connects trading activity with realized price distortion.
Application in ARX Terminal Architecture
ARX Terminal's LiquidityGuard operates as a shadow observer evaluating 20-day scaled Amihud illiquidity and dollar volume, warning traders when order size threatens execution slippage.