Epps Effect and the Signature of Short-Term Momentum Traders

Jérôme Busca; Léon Thomir

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arXiv · 2309.06711

Epps Effect and the Signature of Short-Term Momentum Traders

Jérôme Busca·Léon Thomir

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Abstract

It is a well-documented fact that the correlation function of the returns on two "related" assets is generally increasing as a function of the horizon $h$ of these returns. This phenomenon, termed the Epps Effect, holds true in a wide variety of markets, and there is a large body of literature devoted to its theoretical justification. Our focus here is to describe and understand a deviation to the Epps effect, observed in the context of the foreign exchange and cryptocurrency markets. Specifically, we document a sharp local maximum of the cross-correlation function of returns on the Euro EUR/USD and Bitcoin BTC/USD pairs as a function of $h$. Our claim is that this anomaly reveals the activity of short-term momentum traders.

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Jérôme Busca, Léon Thomir. 2023-09-13. Epps Effect and the Signature of Short-Term Momentum Traders. https://arxiv.org/abs/2309.06711

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