Correlation emergence and the Epps effect in two coupled limit order books

Chris Angstmann and Tim Gebbie

Papers from arXiv.org

Abstract: We give a unified analytic account of correlation emergence and the Epps effect in two coupled limit order books. The model starts from a discrete random-walk description of order flow with creation, cancellation and diffusion. A pair-trader coupling between the books is introduced at the level of order creation. We clarify how the discrete model reduces to coupled reaction--diffusion equations with a moving reaction boundary defining the transaction price. Using a regularised local-response representation of the coupling, we derive approximate closed-form expressions for realised correlations as a function of aggregation time. Here the Epps effect is shown to arise from three distinct mechanisms: asynchronous event clocks (subordination), finite coupling response times, and their combination.

Date: 2026-06
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2606.14182 Latest version (application/pdf)

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:arx:papers:2606.14182

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().