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High frequency correlation modelling

Author

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  • Nicolas Huth

    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec)

  • Frédéric Abergel

    (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec)

Abstract

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.

Suggested Citation

  • Nicolas Huth & Frédéric Abergel, 2010. "High frequency correlation modelling," Post-Print hal-00621244, HAL.
    • Handle: RePEc:hal:journl:hal-00621244
    Note: View the original document on HAL open archive server: https://hal.science/hal-00621244
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    References listed on IDEAS

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    1. Tóth, Bence & Kertész, János, 2006. "Increasing market efficiency: Evolution of cross-correlations of stock returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 360(2), pages 505-515.
    2. Precup, O. V. & Iori, G., 2005. "Cross-correlation measures in the high-frequency domain," Working Papers 05/04, Department of Economics, City University London.
    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. 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.
    5. Bence Toth & Janos Kertesz, 2007. "On the origin of the Epps effect," Papers physics/0701110, arXiv.org, revised Feb 2007.
    6. 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.
    7. Bence Toth & Janos Kertesz, 2009. "The Epps effect revisited," Quantitative Finance, Taylor & Francis Journals, vol. 9(7), pages 793-802.
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    Cited by:

    1. Nicolas Huth & Frédéric Abergel, 2012. "The times change: multivariate subordination, empirical facts," Post-Print hal-00620841, HAL.

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