Which stock price component drives the Amihud illiquidity premium?

•This paper examines the components of stock prices that play a key role in the pricing of the Amihud (2002) illiquidity measure.•The turnover-based half-Amihud illiquidity measures on the days of positive and negative permanent price returns are constructed using the decomposed stock price series.•We find that the transitory half-Amihud measure on the days of negative permanent price returns plays an important role in pricing the Amihud illiquidity.•Our finding contrasts with that of Lou and Shu (2017) in that both the trading volume component and transitory price impact, drive the Amihud illiquidity premium. We examine the components of stock prices that play a key role in the pricing of the Amihud (2002) illiquidity measure. We first decompose the stock price series into permanent and transitory components and then construct the half-Amihud illiquidity measures on the days of positive and negative permanent price returns. We find that the transitory half-Amihud measure on the days of negative permanent price returns plays an important role in pricing the Amihud illiquidity even after controlling for the turnover ratio. This finding contrasts with that of Lou and Shu (2017) in that both the trading volume component and transitory price impact, drive the Amihud illiquidity premium.