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The Epps effect revisited


Tóth, Bence; Kertész, János


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Abstract We analyse the dependence of stock return cross-correlations on the sampling frequency of the data known as the Epps effect: For high resolution data the cross-correlations are significantly smaller than their asymptotic value as observed on daily data. The former description implies that changing trading frequency should alter the characteristic time of the phenomenon. This is not true for the empirical data: The Epps curves do not scale with market activity. The latter result indicates that the time scale of the phenomenon is connected to the reaction time of market participants (this we denote as human time scale), independent of market activity. In this paper we give a new description of the Epps effect through the decomposition of cross-correlations. After testing our method on a model of generated random walk price changes we justify our analytical results by fitting the Epps curves of real world data.
Klassifikation Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Freie Schlagwörter Correlation; Market microstructure; Econophysics; Behavioural finance; Market efficiency
Sprache Dokument Englisch
Publikationsjahr 2009
Seitenangabe S. 793-802
Zeitschriftentitel Quantitative Finance, 9 (2009) 7
DOI http://dx.doi.org/10.1080/14697680802595668
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)