Topology of the correlation networks among major currencies using hierarchical structure methods

Abstract

We studied the topology of correlation networks among 34 major currencies using the concept of a minimal spanning tree and hierarchical tree for the full years of 2007-2008 when major economic turbulence occurred. We used the USD (US Dollar) and the TL (Turkish Lira) as numeraires in which the USD was the major currency and the TL was the minor currency. We derived a hierarchical organization and constructed minimal spanning trees (MSTs) and hierarchical trees (HTs) for the full years of 2007, 2008 and for the 2007-2008 periods. We performed a technique to associate a value of reliability to the links of MSTs and HTs by using bootstrap replicas of data. We also used the average linkage cluster analysis for obtaining the hierarchical trees in the case of the TL as the numeraire. These trees are useful tools for understanding and detecting the global structure, taxonomy and hierarchy in financial data. We illustrated how the minimal spanning trees and their related hierarchical trees developed over a period of time. From these trees we identified different clusters of currencies according to their proximity and economic ties. The clustered structure of the currencies and the key currency in each cluster were obtained and we found that the clusters matched nicely with the geographical regions of corresponding countries in the world such as Asia or Europe. As expected the key currencies were generally those showing major economic activity.

10 Pages,7 figures,1 table

References in corpus (5)

• The Evolution of Interdependence in World Equity Markets - Evidence from Minimum Spanning Trees
• Spanning Trees and bootstrap reliability estimation in correlation based networks
• Topology of Foreign Exchange Markets using Hierarchical Structure Methods
• Sector analysis for a FTSE portfolio of stocks
• Correlations in commodity markets

Cited by in corpus (5)

• Hierarchical structure of the European countries based on debts as a percentage of GDP during the 2000-2011 period
• Dynamic Multi-Factor Clustering of Financial Networks
• Correlation Patterns in Foreign Exchange Markets
• Hierarchical structure of the countries based on electricity consumption and economic growth
• Foreign Exchange Market Performance: Evidence from Bivariate Time Series Approach