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Impact of the tick-size on financial returns and correlations

✍ Scribed by Michael C. Münnix; Rudi Schäfer; Thomas Guhr

Publisher: Elsevier Science
Year: 2010
Tongue: English
Weight: 845 KB
Volume: 389
Category: Article
ISSN: 0378-4371
DOI: 10.1016/j.physa.2010.06.037

No coin nor oath required. For personal study only.

✦ Synopsis

We demonstrate that the lowest possible price change (tick-size) has a large impact on the structure of financial return distributions. It induces a microstructure as well as possibly altering the tail behavior. On small return intervals, the tick-size can distort the calculation of correlations. This especially occurs on small return intervals and thus contributes to the decay of the correlation coefficient towards smaller return intervals (Epps effect). We study this behavior within a model and identify the effect in market data. Furthermore, we present a method to compensate this purely statistical error.

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