Distorted Financial Correlations: The Epps Effect
The Epps effect describes the decrease of correlation estimates in financial data towards smaller return (or sampling-) intervals. This behavior has been of interest since Epps discovered this phenomenon in 1979 . Since then, this behavior was found in data of different stock exchanges [90–93] and foreign exchange markets [94, 95]. An example for the Epps effect in empirical data is presented in Fig. 3.1. Here, the correlation declines for return intervals Δt smaller than five minutes.
KeywordsPrice Change Portfolio Optimization Discretization Error Compensation Method Return Distribution
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