2023/09/13 by Jérôme Busca, Busca, Jérôme, Léon Thomir +1
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Financial Markets and Investment Strategies #Market Dynamics and Volatility
paper · pdf · doi:10.48550/arxiv.2309.06711
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.