Works done in collaboration with János Kertész.
Introduction, correlations
The Epps effect
Publications
Introduction, correlations
Correlations between the individual assets are the main factors in classical
portfolio management thus it is important to understand and give an accurate
description of correlations on different time scales. This is especially so, since
today the time scale in adjusting portfolios to events occuring may be in the
order of minutes.
The Epps effect
1979 Epps reported results showing that stock return correlations decrease
as the sampling frequency of data increases. Since his discovery the
phenomenon has been detected in several studies of different stock markets
and foreign exchange markets.
In our work we analyse the dependence of stock return cross-correlations on
the sampling frequency of the data known as the Epps effect: For high resolution
data the correlations are significantly smaller than their asymptotic value as
observed on daily data. We study prevous works done in the direction and
demonstrate the deficiencies of the existing description and give a relation
between correlations on different time scales. After testing our method on a
model of generated random walk price changes we justify our analytical results
by fitting the correlation curves of real world 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.
Publications
Bence Tóth, Bálint Tóth and János Kertész
Modeling the Epps effect of cross-correlations in asset prices
Proceedings of SPIE Vol. 6601 (Fluctuations and Noise 2007) [link]
abstract | pdf
Bence Tóth, János Kertész
The Epps effect revisited
submitted to Quantitative Finance; (April 2007.)
abstract | pdf
Bence Tóth, János Kertész
On the origin of the Epps effect
Physica A 383(1), 54-58 (2007) (Proc. of the Econophysics Colloquium 2006)[link]
abstract | pdf
Bence Tóth, János Kertész
Increasing market efficiency: Evolution of cross-correlations of stock returns
Physica A 360, 505-515 (2006) [link]
abstract | pdf
