STATISTICAL CAUSES FOR THE EPPS EFFECT IN MICROSTRUCTURE NOISE

Michael C. Münnix (), Rudi Schäfer and Thomas Guhr
Additional contact information
Michael C. Münnix: Department of Physics, University of Duisburg-Essen, 47048 Dusiburg, Germany
Rudi Schäfer: Department of Physics, University of Duisburg-Essen, 47048 Dusiburg, Germany
Thomas Guhr: Department of Physics, University of Duisburg-Essen, 47048 Dusiburg, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 08, 1231-1246

Abstract: We present two statistical causes for the distortion of correlations on high-frequency financial data. We demonstrate that the asynchrony of trades as well as the decimalization of stock prices has a large impact on the decline of the correlation coefficients towards smaller return intervals (Epps effect). These distortions depend on the properties of the time series and are of purely statistical origin. We are able to present parameter-free compensation methods, which we validate in a model setup. Furthermore, the compensation methods are applied to high-frequency empirical data from the NYSE's TAQ database. A major fraction of the Epps effect can be compensated. The contribution of the presented causes is particularly high for stocks that are traded at low prices.

Keywords: Market microstructure; Epps effect; nonsynchronous trading; correlation estimation; covariance estimation; realized variance (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024911006838
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:14:y:2011:i:08:n:s0219024911006838

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024911006838

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().