Impact of the tick-size on financial returns and correlations

2010/01/31 by Michael C. Münnix, Rudi Schäfer, Thomas Guhr · 1 citation
Economics, Econometrics and Finance · #q-fin.ST #q-fin.TR

paper · pdf · doi:10.1016/j.physa.2010.06.037

published as Physica A Vol. 389, No. 21 (2010) · 18 pages, 10 figures

arxiv created 2010/07/12 · arxiv updated 2015/03/13

Abstract

We demonstrate that the lowest possible price change (tick-size) has a large impact on the structure of financial return distributions. It induces a microstructure as well as it can alter the tail behavior. On small return intervals, the tick-size can distort the calculation of correlations. This especially occurs on small return intervals and thus contributes to the decay of the correlation coefficient towards smaller return intervals (Epps effect). We study this behavior within a model and identify the effect in market data. Furthermore, we present a method to compensate this purely statistical error.

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