@inproceedings{164fb1ee6a3448ee879f89540f14274c,
title = "Modeling the Epps effect of cross correlations in asset prices",
abstract = "We review the decomposition method of stock return cross-correlations, presented previously1 for studying the dependence of the correlation coefficient on the resolution of data (Epps effect). Through a toy model of random walk/Brownian motion and memoryless renewal process (i.e. Poisson point process) of observation times we show that in case of analytical treatability, by decomposing the correlations we get the exact result for the frequency dependence. We also demonstrate that our approach produces reasonable fitting of the dependence of correlations on the data resolution in case of empirical data. Our results indicate that the Epps phenomenon is a product of the finite time decay of lagged correlations of high resolution data, which does not scale with activity. The characteristic time is due to a human time scale, the time needed to react to news.",
keywords = "Epps effect, Financial correlations, High frequency data, Market microstructure, Renewal process",
author = "Bence T{\'o}th and B{\'a}lint T{\'o}th and J{\'a}nos Kert{\'e}sz",
year = "2007",
doi = "10.1117/12.727127",
language = "English",
isbn = "0819467383",
series = "Proceedings of SPIE - The International Society for Optical Engineering",
booktitle = "Noise and Stochastics in Complex Systems and Finance",
note = "Noise and Stochastics in Complex Systems and Finance ; Conference date: 21-05-2007 Through 24-05-2007",
}