Yes, this is an old trick i learned and used in my pimpin dorm room at college.
Unfortunatley, you CANNOT make it glow any color you want. Most highlighter liquid does NOT glow that well. Only the eyes=bleeding yellow ones work really well. The florescent pink works ok, and all the normal colors dont light under black light for shit.
No, it doesnt fade, and yes, its water based.
Still have an Absolut bottle full of the stuff from 5 years ago. Still glowing great.