2010/09/30 by Michael C. Münnix, Münnix, Michael C., Rudi Schäfer +3
Economics, Econometrics and Finance · #FOS: Economics and business #Statistical Finance (q-fin.ST) #Trading and Market Microstructure (q-fin.TR) #q-fin.ST #q-fin.TR
paper · pdf · doi:10.48550/arxiv.1009.6157
8 pages, 7 figures
arxiv created 2010/09/30 · arxiv updated 2010/10/01
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.