Regensburg 2010 – scientific programme

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SOE: Fachverband Physik sozio-ökonomischer Systeme

SOE 21: Financial Markets and Risk Management II

SOE 21.3: Talk

Thursday, March 25, 2010, 11:15–11:45, H46

Compensating statistical errors in the calculation of financial correlations — •Michael Christopher Münnix, Rudi Schäfer, and Thomas Guhr — Universität Duisburg-Essen

We present two methods to compensate statistical errors in the calculation of correlations on financial time series. The first method is based on asynchronous time series under the assumption of an underlying time series. The second method is based on the information loss due to the finite tick-size. 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 these statistical effects are a major cause of the Epps effect. Hence, we are able to quantify and to compensate it using only trading prices, trading times and tick-sizes.