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Epps Effect Deviations and Short-Term Momentum in FX and Crypto

Article arXiv papers · Author: Jérôme Busca et al.
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Summary

The document introduces the Epps Effect: correlations between returns on related assets generally rise as the return horizon gets longer. It then describes a reported departure from that pattern in foreign exchange and cryptocurrency markets. The specific observation is a sharp local peak in the cross-correlation between EUR/USD and BTC/USD returns at a particular horizon. The authors interpret this feature as a possible signature of short-term momentum traders.

This is an empirical observation and an interpretation, rather than a complete trading strategy. The excerpt gives no horizon values, sample period, statistical tests, robustness checks, or evidence that the pattern can be traded after costs. It also does not establish that momentum activity is the only explanation for the correlation peak. The finding may help researchers study cross-market interactions and trader behavior, but further evidence is needed to judge its stability and practical use.

Key ideas

  • The Epps Effect describes rising return correlations at longer horizons.
  • The document reports a local cross-correlation peak between EUR/USD and BTC/USD returns.
  • The authors associate the peak with short-term momentum traders.
  • The excerpt does not provide tests of robustness or evidence of post-cost profitability.

Tags

ForexCryptoMomentumStatisticsMarket microstructure
Full text
# Epps Effect and the Signature of Short-Term Momentum Traders


# Epps Effect and the Signature of Short-Term Momentum Traders









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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.