Realized Illiquidity

Realized illiquidity is the ratio between realized volatility and trading volume refining the popular price impact measure proposed by Amihud (2002). We provide its theoretical foundation in which market liquidity, ℓ(𝑡), follows a stochastic process in continuous time. We prove that the realized illiquidity is a precise measurement of the inverse of integrated liquidity, that is, the integral of ℓ(𝑡) over periods of unit length (e.g., a day). We show that the realized illiquidity measures are robust to a number of features such as stochastic volatility and microstructure noise. A comprehensive econometric analysis highlights the main distributional and dynamic properties of the realized illiquidity, including jumps, clustering, and leverage effects, and demonstrate that they help explain the time series of stock and currency returns.