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Epps Effect and the Signature of Short-Term Momentum Traders

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  • J'er^ome Busca
  • L'eon Thomir

Abstract

It is a well-documented fact that the correlation function of the returns on two "related" assets is generally increasing as a function of the horizon $h$ of these returns. This phenomenon, termed the Epps Effect, holds true in a wide variety of markets, and there is a large body of literature devoted to its theoretical justification. Our focus here is to describe and understand a deviation to the Epps effect, observed in the context of the foreign exchange and cryptocurrency markets. Specifically, we document a sharp local maximum of the cross-correlation function of returns on the Euro EUR/USD and Bitcoin BTC/USD pairs as a function of $h$. Our claim is that this anomaly reveals the activity of short-term momentum traders.

Suggested Citation

  • J'er^ome Busca & L'eon Thomir, 2023. "Epps Effect and the Signature of Short-Term Momentum Traders," Papers 2309.06711, arXiv.org.
    • Handle: RePEc:arx:papers:2309.06711
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    References listed on IDEAS

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    1. G. Bonanno & F. Lillo & R. N. Mantegna, 2001. "High-frequency cross-correlation in a set of stocks," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 96-104.
    2. Marco Avellaneda & Sasha Stoikov, 2008. "High-frequency trading in a limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 217-224.
    3. 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.
    4. Chan, Kalok, 1993. "Imperfect Information and Cross-Autocorrelation among Stock Prices," Journal of Finance, American Finance Association, vol. 48(4), pages 1211-1230, September.
    5. Patrick Chang & Etienne Pienaar & Tim Gebbie, 2020. "The Epps effect under alternative sampling schemes," Papers 2011.11281, arXiv.org, revised Aug 2021.
    6. 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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