On Epps effect and rebalancing of hedged portfolio in multiple frequencies

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.