Impact of the tick-size on financial returns and correlations

Michael C. Münnix, Rudi Schäfer and Thomas Guhr

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 21, 4828-4843

Abstract: We demonstrate that the lowest possible price change (tick-size) has a large impact on the structure of financial return distributions. It induces a microstructure as well as possibly altering the tail behavior. On small return intervals, the tick-size can distort the calculation of correlations. This especially occurs on small return intervals and thus contributes to the decay of the correlation coefficient towards smaller return intervals (Epps effect). We study this behavior within a model and identify the effect in market data. Furthermore, we present a method to compensate this purely statistical error.

Keywords: Financial correlations; Epps effect; Market emergence; Covariance estimation; Tick-size; Market microstructure (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:21:p:4828-4843

DOI: 10.1016/j.physa.2010.06.037

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