Thu, 17 May 2018
16:00 -
17:30
L4
Accounting for the Epps Effect: Realized Covariation, Cointegration and Common Factors
Jeremy Large
(Economics (Oxford University))
Abstract
High-frequency realized variance approaches offer great promise for
estimating asset prices’ covariation, but encounter difficulties
connected to the Epps effect. This paper models the Epps effect in a
stochastic volatility setting. It adds dependent noise to a factor
representation of prices. The noise both offsets covariation and
describes plausible lags in information transmission. Non-synchronous
trading, another recognized source of the effect, is not required. A
resulting estimator of correlations and betas performs well on LSE
mid-quote data, lending empirical credence to the approach.