On Epps effect and rebalancing of hedged portfolio in multiple frequencies

Mustafa U. Torun; Ali Akansu

doi:10.1109/CAMSAP.2011.6136020

On Epps effect and rebalancing of hedged portfolio in multiple frequencies

Mustafa U. Torun, Ali Akansu

Electrical and Computer Engineering

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

1 Scopus citations

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.

Original language	English (US)
Title of host publication	2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011
Pages	33-36
Number of pages	4
DOIs	https://doi.org/10.1109/CAMSAP.2011.6136020
State	Published - Dec 1 2011
Event	2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011 - San Juan, Puerto Rico Duration: Dec 13 2011 → Dec 16 2011

Other

Other	2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011
Country	Puerto Rico
City	San Juan
Period	12/13/11 → 12/16/11

All Science Journal Classification (ASJC) codes

Computer Networks and Communications

Access to Document

10.1109/CAMSAP.2011.6136020

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title = "On Epps effect and rebalancing of hedged portfolio in multiple frequencies",

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.",

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pages = "33--36",

booktitle = "2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011",

note = "2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011 ; Conference date: 13-12-2011 Through 16-12-2011",

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Torun, MU & Akansu, A 2011, On Epps effect and rebalancing of hedged portfolio in multiple frequencies. in 2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011., 6136020, pp. 33-36, 2011 4th IEEE International Workshop on Computational Advances in Multi-Sensor Adaptive Processing, CAMSAP 2011, San Juan, Puerto Rico, 12/13/11. https://doi.org/10.1109/CAMSAP.2011.6136020

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AB - 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.

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