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Statistical Causes For The Epps Effect In Microstructure Noise

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  • 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)

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.

Suggested Citation

  • Michael C. Münnix & Rudi Schäfer & Thomas Guhr, 2011. "Statistical Causes For The Epps Effect In Microstructure Noise," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(08), pages 1231-1246.
    • Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:08:n:s0219024911006838
    DOI: 10.1142/S0219024911006838
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    References listed on IDEAS

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    1. 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.
    2. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Econometric Analysis of Realised Covariation: High Frequency Covariance, Regression and Correlation in Financial Economics," Economics Papers 2002-W13, Economics Group, Nuffield College, University of Oxford, revised 18 Mar 2002.
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    Cited by:

    1. Juan C. Henao-Londono & Sebastian M. Krause & Thomas Guhr, 2021. "Price response functions and spread impact in correlated financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 94(4), pages 1-20, April.
    2. Patrick Chang & Etienne Pienaar & Tim Gebbie, 2020. "The Epps effect under alternative sampling schemes," Papers 2011.11281, arXiv.org, revised Aug 2021.
    3. Patrick Chang & Etienne Pienaar & Tim Gebbie, 2020. "Malliavin-Mancino estimators implemented with non-uniform fast Fourier transforms," Papers 2003.02842, arXiv.org, revised Nov 2020.
    4. Henao-Londono, Juan C. & Guhr, Thomas, 2022. "Foreign exchange markets: Price response and spread impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 589(C).
    5. Chang, Patrick & Pienaar, Etienne & Gebbie, Tim, 2021. "The Epps effect under alternative sampling schemes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 583(C).

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