Compensating asynchrony effects in the calculation of financial correlations

Details Compensating asynchrony effects in the calculation of financial correlations Compensating asynchrony effects in the calculation of financial correlations

2009-10-15

arxiv.org/abs/0910.2909v3

Physica A Vol. 389, No. 4 (2010)

Economy

Quantitative Finance

Statistical Finance

13 pages, 7 figures

Scientific paper

10.1016/j.physa.2009.10.033

We present a method to compensate statistical errors in the calculation of correlations on asynchronous time series. The method is based on the assumption of an underlying time series. We set up a model and apply it to financial data to examine the decrease of calculated correlations towards smaller return intervals (Epps effect). We show that this statistical effect is a major cause of the Epps effect. Hence, we are able to quantify and to compensate it using only trading prices and trading times.

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