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A Closer Look At The Epps Effect

Author

Listed:
  • ROBERTO RENÒ

    (Dipartimento di Economia Politica, Università di Siena, Piazza S. Francesco, 7, 53100 Siena, Italy)

Abstract

Epps [17] reported empirical evidence that stock correlations decrease when sampling frequency increases. This phenomenon, named Epps effect, has been observed in several markets. In this paper, the dynamics underlying the Epps effect are investigated. Using Monte Carlo simulations and the analysis of high frequency foreign exchange rate and stock price data, it is shown that the Epps effect can largely be explained by two factors: the non-synchronicity of price observations and the existing lead-lag relationship between asset prices. In order to compute co-volatilities, an original method based upon the Fourier analysis is adopted. This method performs well in estimating correlations precisely, as illustrated by simulated experiments. Being naturally embedded in the frequency domain, this estimator is well suited to the study of the Epps effect.

Suggested Citation

  • Roberto Renò, 2003. "A Closer Look At The Epps Effect," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 87-102.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:01:n:s0219024903001839
    DOI: 10.1142/S0219024903001839
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    Citations

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    Cited by:

    1. Iori, G. & Precup, O. V., 2006. "Weighted network analysis of high frequency cross-correlation measures," Working Papers 1453, Department of Economics, City University London.
    2. Neil Shephard & Ole E. Barndorff-Nielsen & Department of Mathematical Sciences & University of Aarhus & Denmark, 2005. "Variation, jumps, market frictions and high frequency data in financial econometrics," Economics Series Working Papers 240, University of Oxford, Department of Economics.
    3. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frederic Abergel, 2011. "Econophysics review: II. Agent-based models," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 1013-1041.
    4. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frédéric Abergel, 2011. "Econophysics review: I. Empirical facts," Post-Print hal-00621058, HAL.
    5. repec:cty:dpaper:10.1080/13518470600813565 is not listed on IDEAS
    6. Takaki Hayashi & Yuta Koike, 2017. "No arbitrage and lead-lag relationships," Papers 1712.09854, arXiv.org.
    7. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frederic Abergel, 2011. "Econophysics review: I. Empirical facts," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 991-1012.
    8. Fulvio Corsi & Francesco Audrino, 2012. "Realized Covariance Tick-by-Tick in Presence of Rounded Time Stamps and General Microstructure Effects," Journal of Financial Econometrics, Oxford University Press, vol. 10(4), pages 591-616, September.
    9. Giorgio Mirone, 2018. "Cross-sectional noise reduction and more efficient estimation of Integrated Variance," CREATES Research Papers 2018-18, Department of Economics and Business Economics, Aarhus University.
    10. Arnab Chakrabarti & Rituparna Sen, 2019. "Copula estimation for nonsynchronous financial data," Papers 1904.10182, arXiv.org, revised Sep 2020.
    11. Barndorff-Nielsen, Ole E. & Hansen, Peter Reinhard & Lunde, Asger & Shephard, Neil, 2011. "Multivariate realised kernels: Consistent positive semi-definite estimators of the covariation of equity prices with noise and non-synchronous trading," Journal of Econometrics, Elsevier, vol. 162(2), pages 149-169, June.
    12. Precup, O. V. & Iori, G., 2005. "Cross-correlation measures in the high-frequency domain," Working Papers 1439, Department of Economics, City University London.
    13. Patrick Chang, 2020. "Fourier instantaneous estimators and the Epps effect," Papers 2007.03453, arXiv.org, revised Sep 2020.
    14. repec:cty:dpaper:10.1103/physreve.75.036110 is not listed on IDEAS
    15. Patrick Chang & Etienne Pienaar & Tim Gebbie, 2020. "The Epps effect under alternative sampling schemes," Papers 2011.11281, arXiv.org, revised Aug 2021.
    16. Nicolas Huth & Frédéric Abergel, 2010. "High frequency correlation modelling," Post-Print hal-00621244, HAL.
    17. Henryk Gurgul & Artur Machno, 2017. "The impact of asynchronous trading on Epps effect on Warsaw Stock Exchange," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 25(2), pages 287-301, June.
    18. Lei Tan & Jun-Jie Chen & Bo Zheng & Fang-Yan Ouyang, 2016. "Exploring Market State and Stock Interactions on the Minute Timescale," PLOS ONE, Public Library of Science, vol. 11(2), pages 1-13, February.
    19. J'er^ome Busca & L'eon Thomir, 2023. "Epps Effect and the Signature of Short-Term Momentum Traders," Papers 2309.06711, arXiv.org.

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