Detecting a Currency's Dominance or Dependence using Foreign Exchange Network Trees

Mark McDonald; Omer Suleman; Stacy Williams; Sam Howison; Neil F. Johnson

doi:10.1103/physreve.72.046106

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Detecting a Currency's Dominance or Dependence using Foreign Exchange Network Trees

Mark McDonald·Omer Suleman·Stacy Williams·Sam Howison·Neil F. Johnson

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Abstract

In a system containing a large number of interacting stochastic processes, there will typically be many non-zero correlation coefficients. This makes it difficult to either visualize the system's inter-dependencies, or identify its dominant elements. Such a situation arises in Foreign Exchange (FX) which is the world's biggest market. Here we develop a network analysis of these correlations using Minimum Spanning Trees (MSTs). We show that not only do the MSTs provide a meaningful representation of the global FX dynamics, but they also enable one to determine momentarily dominant and dependent currencies. We find that information about a country's geographical ties emerges from the raw exchange-rate data. Most importantly from a trading perspective, we discuss how to infer which currencies are `in play' during a particular period of time.

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Mark McDonald, Omer Suleman, Stacy Williams, Sam Howison, Neil F. Johnson. 2004-12-15. Detecting a Currency's Dominance or Dependence using Foreign Exchange Network Trees. https://doi.org/10.1103/physreve.72.046106

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