Definition

Amihud (2002) develops a measure of illiquidity of a security at time $t$ as$${\mathrm{ILLIQ}}_t=\frac{|R_t|}{{\mathrm{VOLD}}_t}$$Where $R_t$ is the stock return and ${\mathrm{VOLD}}_t$ is volume in 100 million dollars (V- Lab chooses the scaling of the dollar volume to enhance readability). This measure captures the intuition that a security is less liquid if a given trading volume generates a greater move in its price. It only requires daily data on prices and trading volumes, yet it is highly correlated with other illiquidity measures that require more data inputs.

The historical ILLIQ measure is the 22 trading days (i.e. 1 month) moving average of ${\mathrm{ILLIQ}}_t$

Amihud, Y. 2002. Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5:31 – 56. URL http://www.sciencedirect.com/science/article/pii/S1386418101000246.