Fourier instantaneous estimators and the Epps effect

TL;DR

This paper compares Fourier-based estimators to understand and address the Epps effect caused by asynchrony in high-frequency financial data, proposing a method to improve estimation stability.

Contribution

It introduces a simple approach to mitigate the instantaneous Epps effect and compares the stability of two Fourier estimators in high-frequency finance.

Findings

The Epps effect is observable in high-frequency data.

The Malliavin-Mancino estimator provides more stable estimates under asynchrony.

The proposed method reduces the impact of the Epps effect in empirical data.

Abstract

We compare the Malliavin-Mancino and Cuchiero-Teichmann Fourier instantaneous estimators to investigate the impact of the Epps effect arising from asynchrony in the instantaneous estimates. We demonstrate the instantaneous Epps effect under a simulation setting and provide a simple method to ameliorate the effect. We find that using the previous tick interpolation in the Cuchiero-Teichmann estimator results in unstable estimates when dealing with asynchrony, while the ability to bypass the time domain with the Malliavin-Mancino estimator allows it to produce stable estimates and is therefore better suited for ultra-high frequency finance. An empirical analysis using Trade and Quote data from the Johannesburg Stock Exchange illustrates the instantaneous Epps effect and how the intraday correlation dynamics can vary between days for the same equity pair.