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Similarity measure and topology evolution of foreign exchange markets using dynamic time warping method: Evidence from minimal spanning tree

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Author Info

  • Wang, Gang-Jin
  • Xie, Chi
  • Han, Feng
  • Sun, Bo

Abstract

In this study, we employ a dynamic time warping method to study the topology of similarity networks among 35 major currencies in international foreign exchange (FX) markets, measured by the minimal spanning tree (MST) approach, which is expected to overcome the synchronous restriction of the Pearson correlation coefficient. In the empirical process, firstly, we subdivide the analysis period from June 2005 to May 2011 into three sub-periods: before, during, and after the US sub-prime crisis. Secondly, we choose NZD (New Zealand dollar) as the numeraire and then, analyze the topology evolution of FX markets in terms of the structure changes of MSTs during the above periods. We also present the hierarchical tree associated with the MST to study the currency clusters in each sub-period. Our results confirm that USD and EUR are the predominant world currencies. But USD gradually loses the most central position while EUR acts as a stable center in the MST passing through the crisis. Furthermore, an interesting finding is that, after the crisis, SGD (Singapore dollar) becomes a new center currency for the network.

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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 391 (2012)
Issue (Month): 16 ()
Pages: 4136-4146

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Handle: RePEc:eee:phsmap:v:391:y:2012:i:16:p:4136-4146

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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Keywords: Econophysics; Dynamic time warping; Similarity measure; Minimal spanning tree; Foreign exchange markets; US sub-prime crisis;

References

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Citations

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Cited by:
  1. Wang, Gang-Jin & Xie, Chi, 2013. "Cross-correlations between Renminbi and four major currencies in the Renminbi currency basket," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(6), pages 1418-1428.
  2. Wang, Gang-Jin & Xie, Chi & Chen, Shou & Yang, Jiao-Jiao & Yang, Ming-Yan, 2013. "Random matrix theory analysis of cross-correlations in the US stock market: Evidence from Pearson’s correlation coefficient and detrended cross-correlation coefficient," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3715-3730.

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