What it means
A stock's price can move substantially on a day with little trading. The Amihud illiquidity ratio summarizes that relationship by comparing the size of each day's price change with the dollar value of shares traded that day. A higher ratio means a larger observed price move per dollar traded; a lower ratio means a smaller one.
It is an indirect liquidity measure based on historical daily data. It does not show the current bid-ask spread, available shares at quoted prices, or the cost of executing a particular order. Large returns may also reflect news rather than trading pressure.
How it is calculated
ILLIQ = (1 / N) × Σ[t=1 to N] (|R_t| / V_t)
ILLIQis the average daily Amihud illiquidity ratio over the chosen period.Nis the number of included trading days with valid returns and positive dollar volume.R_tis the stock's return on dayt, expressed as a decimal. For a simple close-to-close return,R_t = (P_t − P_(t−1)) / P_(t−1), whereP_tandP_(t−1)are consecutive closing prices in the same currency per share. Adjusted prices can account for stock splits and other corporate actions.V_tis dollar trading volume on dayt, in US$: shares traded × price per share. If a daily dollar-volume figure is unavailable, a closing-price approximation can be used, but it should be labeled as such.Σmeans add the daily ratios before dividing byN.
Because returns are dimensionless, the ratio's unit is per US$ traded. Quoting it per US$1 million traded multiplies the raw ratio by 1,000,000; specify the scale when comparing values. A zero-volume day cannot enter the formula because division by zero is undefined.
Worked example
Suppose a hypothetical stock has these figures on three trading days. Dollar volumes are assumed known, and returns are close-to-close absolute returns.
| Day | Absolute return | Dollar volume | Return ÷ dollar volume |
|---|---|---|---|
| 1 | 1% = 0.01 | US$1,000,000 | 0.00000001 per US$ |
| 2 | 2% = 0.02 | US$2,000,000 | 0.00000001 per US$ |
| 3 | 1% = 0.01 | US$500,000 | 0.00000002 per US$ |
Add the daily ratios: 0.00000001 + 0.00000001 + 0.00000002 = 0.00000004. Divide by three: ILLIQ ≈ 0.0000000133 per US$, or 0.0133 per US$1 million traded on the stated scale. This is an average of daily ratios, not the sum of returns divided by the sum of dollar volumes. It does not mean that a US$1 million order would move the price by 1.33%.
Why it matters before you trade
The ratio can help flag stocks whose historical price moves have been large relative to their trading activity. In a pre-trade check, that prompts closer examination of current volume, bid-ask spread, market depth and the proposed order's participation in daily volume. Two stocks with similar dollar volume can have different ratios if their daily returns differ.
Use consistent return definitions, currencies and observation periods when comparing stocks. A short window can be dominated by an unusual news day; a long window can miss a recent change in liquidity. The ratio does not determine a suitable order size or execution strategy on its own.
How PreTrAIde uses it
PreTrAIde does not list the Amihud illiquidity ratio among its quantitative measures. Its pre-trade analysis instead considers measures including estimated bid-ask spread, participation in daily volume, modeled market impact, liquidity scoring and tiering, and volatility. For a user-built stock basket, it returns GO, NO-GO or MODIFY verdicts with reasoning and a suggested execution strategy. These are decision-support outputs, not trade recommendations.
Common mistakes
- Calling it an execution-cost estimate: A historical return-to-volume ratio is not a quoted spread or a predicted fill price.
- Mixing percentages and decimals: Entering
1instead of0.01for a 1% return makes the result 100 times too large. - Ignoring units or scaling: A figure reported per US$ differs numerically from one scaled per US$1 million.
- Assuming every price move reflects illiquidity: Company news and broad-market moves can change returns even when trading is active.