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Finding changes in the foreign exchange market from the perspective of currency network

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  • Li, Bing
  • Liao, Zefang

Abstract

This research examines the foreign exchange (FX) market from the perspective of currency network. We construct the network based on correlations between exchange rates of 37 currencies from 2006 to 2012. The minimum spanning tree (MST) is used to generate a simplified network and bootstrap technique is employed to test the reliability of links. The full correlation matrices are further analyzed to support and test the robustness of the results from the MSTs. Specifically, we compare the results in the pre-crisis period (2006–2007) and the post-crisis period (2011–2012) to show the impact of the 2008 global financial crisis on the FX market. We have the following findings: (a) the currency network is more scattered in the post-crisis period; (b) the connections between currencies tend to be more internal within the geographic region after the crisis; (c) the European currencies maintain strong connections and keep their clustering feature stable.

Suggested Citation

  • Li, Bing & Liao, Zefang, 2020. "Finding changes in the foreign exchange market from the perspective of currency network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 545(C).
    • Handle: RePEc:eee:phsmap:v:545:y:2020:i:c:s0378437119320783
    DOI: 10.1016/j.physa.2019.123727
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    References listed on IDEAS

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    1. Wang, Gang-Jin & Xie, Chi & Han, Feng & Sun, Bo, 2012. "Similarity measure and topology evolution of foreign exchange markets using dynamic time warping method: Evidence from minimal spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(16), pages 4136-4146.
    2. Keskin, Mustafa & Deviren, Bayram & Kocakaplan, Yusuf, 2011. "Topology of the correlation networks among major currencies using hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(4), pages 719-730.
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    4. Jang, Wooseok & Lee, Junghoon & Chang, Woojin, 2011. "Currency crises and the evolution of foreign exchange market: Evidence from minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(4), pages 707-718.
    5. Naylor, Michael J. & Rose, Lawrence C. & Moyle, Brendan J., 2007. "Topology of foreign exchange markets using hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 199-208.
    6. Jarosław Kwapień & Sylwia Gworek & Stanisław Drożdż & Andrzej Górski, 2009. "Analysis of a network structure of the foreign currency exchange market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(1), pages 55-72, June.
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    More about this item

    Keywords

    Currency network; Foreign exchange market; Minimum spanning tree; E-I index;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access

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