Correlation emergence and the Epps effect in two coupled limit order books
Abstract
We give a unified analytic account of correlation emergence and the Epps effect in two coupled limit order books. The Epps effect is the empirical reduction in measured cross-asset log-return correlation at short aggregation scales, or equivalently the recovery of measured correlation as the aggregation interval increases. The model starts from a fixed-grid discrete random walk for order flow in operational time, with creation, cancellation and diffusion. A pair-trader coupling between the books is introduced at the level of order creation, and calendar time is imposed through separate observation clocks. We clarify how the operational-time model reduces to coupled reaction--diffusion equations with a moving reaction boundary defining the model log-mid-price. Using a regularised local-response representation of the coupling, we derive approximate closed-form expressions for realised correlations as a function of aggregation time. Here the Epps effect is shown to arise from two distinct mechanisms: asynchronous observation clocks (subordination), finite coupling response times, and their combination.
Versions
Related
- Cooperative Multi-Agent Reinforcement Learning for Market Making on Prediction-Market Order Books
- Upper Bound on the Correlation Energy of a Dense Fermi Gas in the Thermodynamic Limit
- Continuity of Global Attractors under a Mass-Preserving Singular Memory Limit, with an Application to a Coupled Suspension Bridge System
- Observable Lyapunov Exponents for Globally Coupled Maps in the Mean-Field Limit
- The emergence of rapid oscillations in a fifth-order KdV equation
BibTeX
@misc{angstmann2026correlation,
title = {{Correlation emergence and the Epps effect in two coupled limit order books}},
author = {Chris Angstmann and Tim Gebbie},
howpublished = {arXiv},
year = {2026},
month = sep,
doi = {10.48550/arxiv.2606.14182},
eprint = {2606.14182},
archivePrefix = {arXiv},
url = {https://arxiv.org/abs/2606.14182},
note = {CC BY-NC-SA 4.0},
}
RIS
TY - UNPB
TI - Correlation emergence and the Epps effect in two coupled limit order books
AU - Chris Angstmann
AU - Tim Gebbie
PY - 2026
DA - 2026/09/05
PB - arXiv
DO - 10.48550/arxiv.2606.14182
UR - https://arxiv.org/abs/2606.14182
AB - We give a unified analytic account of correlation emergence and the Epps effect in two coupled limit order books. The Epps effect is the empirical reduction in measured cross-asset log-return correlation at short aggregation scales, or equivalently the recovery of measured correlation as the aggregation interval increases. The model starts from a fixed-grid discrete random walk for order flow in operational time, with creation, cancellation and diffusion. A pair-trader coupling between the books is introduced at the level of order creation, and calendar time is imposed through separate observation clocks. We clarify how the operational-time model reduces to coupled reaction--diffusion equations with a moving reaction boundary defining the model log-mid-price. Using a regularised local-response representation of the coupling, we derive approximate closed-form expressions for realised correlations as a function of aggregation time. Here the Epps effect is shown to arise from two distinct mechanisms: asynchronous observation clocks (subordination), finite coupling response times, and their combination.
ER -