Realized Illiquidity

We develop a simple theory of realized illiquidity, defined as the ratio of realized volatility to trading volume. Building on the widely used price impact measure of Amihud (2002), we introduce the realized Amihud, which significantly improves measurement accuracy. Our theoretical and numerical results show that it robustly captures cumulative intraday price sensitivity to trading, accounting for stochastic volatility, microstructure noise, and information jumps. Empirically, we uncover distinct time-series patterns in realized stock illiquidity—heterogeneous clustering, leverage effects—and show that it predicts short-term returns.

This paper was accepted by Agostino Capponi, finance.

Funding: A. Ranaldo acknowledges financial support from the Swiss National Science Foundation [SNSF Grant 182303]. P. Santucci de Magistris also acknowledges the research support of the Project 2 Grant of the Danish Council for Independent Research (IRFD), Social Sciences, No. 8019-00015A, and of the European Union’s - Next Generation EU program through the Italian PRIN 2022 -M4C2, Investment 1.1 - “Monitoring Risks in Financial Markets” – Codice Cineca: 2022NEL482 - CUP: I53D23003410008. D. Lacava acknowledges that part of this research was carried out while he was affiliated with Luiss University, within the project “Financial Modeling under Non-Gaussian Distributions”.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.02505 .