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تسجيل مستخدم جديدFourier instantaneous estimators and the Epps effect
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Patrick Chang
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We compare the Malliavin-Mancino and Cuchiero-Teichmann Fourier instantaneous estimators to investigate the impact of the Epps effect arising from asynchrony in the instantaneous estimates. We demonstrate the instantaneous Epps effect under a simulation setting and provide a simple method to ameliorate the effect. We find that using the previous tick interpolation in the Cuchiero-Teichmann estimator results in unstable estimates when dealing with asynchrony, while the ability to bypass the time domain with the Malliavin-Mancino estimator allows it to produce stable estimates and is therefore better suited for ultra-high frequency finance. An empirical analysis using Trade and Quote data from the Johannesburg Stock Exchange illustrates the instantaneous Epps effect and how the intraday correlation dynamics can vary between days for the same equity pair.
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Time and the choice of measurement time scales is fundamental to how we choose to represent information and data in finance. This choice implies both the units and the aggregation scales for the resulting statistical measurables used to describe a fi
nancial system. It also defines how we measure the relationship between different traded instruments. As we move from high-frequency time scales, when individual trade and quote events occur, to the mesoscales when correlations emerge in ways that can conform to various latent models; it remains unclear what choice of time and sampling rates are appropriate to faithfully capture system dynamics and asset correlations for decision making. The Epps effect is the key phenomenology that couples the emergence of correlations to the choice of sampling time scales. Here we consider and compare the Epps effect under different sampling schemes in order to contrast three choices of time: calendar time, volume time and trade time. Using a toy model based on a Hawkes process, we are able to achieve simulation results that conform well with empirical dynamics. Concretely, we find that the Epps effect is present under all three definitions of time and that correlations emerge faster under trade time compared to calendar time, whereas correlations emerge linearly under volume time.
The Epps effect is key phenomenology relating to high frequency correlation dynamics in the financial markets. We argue that it can be used to determine whether trades at a tick-by-tick scale are best represented as samples from a Brownian diffusion,
perhaps dressed with jumps; or as samples from truly discrete events represented as connected point processes. This can answer the question of whether correlations are better understood as an emergent time scale dependent property. In other words: Is the Epps effect a bias? To this end, we derive the Epps effect arising from asynchrony and provide a refined method to correct for the effect. The correction is compared against two existing methods correcting for asynchrony. We propose three experiments to discriminate between possible underlying representations: whether the data is best thought to be generated by discrete connected events (as proxied by a D-type Hawkes process), or if they can be approximated to arise from Brownian diffusions, with or without jumps. We then demonstrate how the Hawkes representation easily recovers the phenomenology reported in the literature; phenomenology that cannot be recovered using a Brownian representation, without additional ad-hoc model complexity, even with jumps. The experiments are applied to trade and quote data from the Johannesburg Stock Exchange. We find evidence suggesting that high frequency correlation dynamics are most faithfully recovered when tick-by-tick data is represented as a web of inter-connected discrete events rather than sampled or averaged from underlying continuous Brownian diffusions irrespective of whether or not they are dressed with jumps.
We implement and test kernel averaging Non-Uniform Fast Fourier Transform (NUFFT) methods to enhance the performance of correlation and covariance estimation on asynchronously sampled event-data using the Malliavin-Mancino Fourier estimator. The meth
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