High frequency correlation modelling

Nicolas Huth () and Frédéric Abergel ()
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Nicolas Huth: MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec
Frédéric Abergel: MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec

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Abstract: Many statistical arbitrage strategies, such as pair trading or basket trading, are based on several assets. Optimal execution routines should also take into account correlation between stocks when proceeding clients orders. However, not so much effort has been devoted to correlation modelling and only few empirical results are known about high frequency correlation. We develop a theoretical framework based on correlated point processes in order to capture the Epps effect in section 1. We show in section 2 that this model converges to correlated Brownian motions when moving to large time scales. A way of introducing non-Gaussian correlations is also discussed in section 2. We conclude by addressing the limits of this model and further research on high frequency correlation.

Date: 2010-03
New Economics Papers: this item is included in nep-ets and nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-00621244
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Citations: View citations in EconPapers (1)

Published in 5th Kolkata Econophysics conference, Mar 2010, Kolkata, India. Econophysics of order-driven markets, p 189-202

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