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The Epps effect revisited

[journal article]

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.
Classification Economic Statistics, Econometrics, Business Informatics
Free Keywords Correlation; Market microstructure; Econophysics; Behavioural finance; Market efficiency
Document language English
Publication Year 2009
Page/Pages p. 793-802
Journal Quantitative Finance, 9 (2009) 7
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)