On Epps Effect and Rebalancing of Hedged Portfolio in Multiple Frequencies

4 Pages Posted: 17 Jan 2012

See all articles by Ali Akansu

Ali Akansu

New Jersey Institute of Technology

Mustafa Torun

New Jersey Institute of Technology

Date Written: January 17, 2012

Abstract

Correlations of financial asset returns play a central role in designing investment portfolios by using Markowitz’s modern portfolio theory (MPT). Correlations are calculated from asset prices that happen at various trading time intervals. Therefore, trading frequency dictates correlation values. This phenomenon is called the Epps effect in finance. We present variations of correlations as a function of trading frequency to quantify Epps effect. The results reiterate that portfolio rebalancing, particularly in multiple trading frequencies, requires good estimation of correlations in order to deliver reliable hedging.

Suggested Citation

Akansu, Ali and Torun, Mustafa, On Epps Effect and Rebalancing of Hedged Portfolio in Multiple Frequencies (January 17, 2012). Available at SSRN: https://ssrn.com/abstract=1986830 or http://dx.doi.org/10.2139/ssrn.1986830

Ali Akansu (Contact Author)

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

Mustafa Torun

New Jersey Institute of Technology ( email )

University Heights
Newark, NJ 07102
United States

HOME PAGE: http://web.njit.edu/~umt2

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