Advertisement

High Frequency Correlation Modelling

  • Nicolas Huth
  • Frédéric Abergel
Part of the New Economic Windows book series (NEW)

Abstract

Many statistical arbitrage strategies, such as pair trading or basket trading, are based on several assets. Optimal execution routines should also take into account correlation between stocks when proceeding clients orders. However, not so much effort has been devoted to correlation modelling and only few empirical results are known about high frequency correlation. Depending on the time scale under consideration, a plausible candidate for modelling correlation should:
  • at high frequency: reproduce the Epps effect [1], take into account lead-lag relationships between assets [2]

  • at the daily scale: avoid purely Gaussian correlations [3].

Keywords

Point Process Epps Effect Epps Curve Order Book Market Order 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Epps T. W. (1979) Comovements in Stock Prices in the Very Short-Run. Journal of the American Statistical Association 74, 291–298Google Scholar
  2. 2.
    Toth B., Kertesz J. (2009) The Epps Effect Revisited, Quantitative Finance 9(7), 793–802CrossRefGoogle Scholar
  3. 3.
    Bouchaud J.-P., Potters M. (2004) Theory of Financial Risk and Derivative Pricing, From Statistical Physics to Risk Management. Cambridge University PressGoogle Scholar
  4. 4.
    Reno R. (2003) A Closer Look at the Epps Effect. International Journal of Theoretical and Applied Finance 6: 87–102CrossRefGoogle Scholar
  5. 5.
    Toth B., Kertesz J. (2006) Increasing Market Efficiency: Evolution of Cross-Correlations of Stock Returns, Physica A 360, 505–515CrossRefGoogle Scholar
  6. 6.
    Iori G., Precup O.V. (2006) Cross-correlation Measures in the High Frequency Domain, Working PaperGoogle Scholar
  7. 7.
    Toth B., Kertesz J. (2007) On the origin of the Epps Effect, Physica A 383(1), 54–58CrossRefGoogle Scholar
  8. 8.
    Bacry E. (2010) Modeling microstructure noise using point processes, Econophys-Kolkata V Conference, submitted to Quantitative finance papersGoogle Scholar
  9. 9.
    Robert C. Y., Rosenbaum M. (2009) On the limiting spectral distribution of the covariance matrices of time-lagged processes, to appear in Journal of Multivariate AnalysisGoogle Scholar
  10. 10.
    Robert C. Y., Rosenbaum M., Hoffman M., Yoshida N. (2010) Estimation of the lead-lag parameter from non-synchronous data, Working PaperGoogle Scholar

Copyright information

© Springer-Verlag Italia 2011

Authors and Affiliations

  • Nicolas Huth
    • 1
    • 2
  • Frédéric Abergel
    • 1
    • 2
  1. 1.Laboratory of Mathematics Applied to SystemsÉcole Centrale ParisChâtenay-MalabryFrance
  2. 2.Natixis CIBParis

Personalised recommendations