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High frequency correlation modelling

Listed author(s):
  • Nicolas Huth


    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris)

  • Frédéric Abergel


    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris)

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    Many statistical arbitrage strategies, such as pair trading or basket trading, are based on several assets. Optimal execution routines should also take into account correlation between stocks when proceeding clients orders. However, not so much effort has been devoted to correlation modelling and only few empirical results are known about high frequency correlation. We develop a theoretical framework based on correlated point processes in order to capture the Epps effect in section 1. We show in section 2 that this model converges to correlated Brownian motions when moving to large time scales. A way of introducing non-Gaussian correlations is also discussed in section 2. We conclude by addressing the limits of this model and further research on high frequency correlation.

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    Paper provided by HAL in its series Post-Print with number hal-00621244.

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    Date of creation: Mar 2010
    Publication status: Published in F. Abergel, B. Chakrabarti, A. Chakraborti, M. Mitra. 5th Kolkata Econophysics conference, Mar 2010, Kolkata, India. Springer, Econophysics of order-driven markets, p 189-202, 2011, New economic window
    Handle: RePEc:hal:journl:hal-00621244
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    1. Ovidiu V. Precup & Giulia Iori, 2007. "Cross-correlation Measures in the High-frequency Domain," The European Journal of Finance, Taylor & Francis Journals, vol. 13(4), pages 319-331.
    2. Bence Toth & Janos Kertesz, 2009. "The Epps effect revisited," Quantitative Finance, Taylor & Francis Journals, vol. 9(7), pages 793-802.
    3. Tóth, Bence & Kertész, János, 2007. "On the origin of the Epps effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(1), pages 54-58.
    4. Bence Toth & Janos Kertesz, 2007. "On the origin of the Epps effect," Papers physics/0701110,, revised Feb 2007.
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