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Dynamical Clustering of Exchange Rates

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Listed:
  • Daniel J. Fenn
  • Mason A. Porter
  • Peter J. Mucha
  • Mark McDonald
  • Stacy Williams
  • Neil F. Johnson
  • Nick S. Jones

Abstract

We use techniques from network science to study correlations in the foreign exchange (FX) market over the period 1991--2008. We consider an FX market network in which each node represents an exchange rate and each weighted edge represents a time-dependent correlation between the rates. To provide insights into the clustering of the exchange rate time series, we investigate dynamic communities in the network. We show that there is a relationship between an exchange rate's functional role within the market and its position within its community and use a node-centric community analysis to track the time dynamics of this role. This reveals which exchange rates dominate the market at particular times and also identifies exchange rates that experienced significant changes in market role. We also use the community dynamics to uncover major structural changes that occurred in the FX market. Our techniques are general and will be similarly useful for investigating correlations in other markets.

Suggested Citation

  • Daniel J. Fenn & Mason A. Porter & Peter J. Mucha & Mark McDonald & Stacy Williams & Neil F. Johnson & Nick S. Jones, 2009. "Dynamical Clustering of Exchange Rates," Papers 0905.4912, arXiv.org, revised Apr 2010.
    • Handle: RePEc:arx:papers:0905.4912
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    Cited by:

    1. Leonidas Sandoval Junior, 2011. "Cluster formation and evolution in networks of financial market indices," Papers 1111.5069, arXiv.org.
    2. Leonidas Sandoval Junior, 2011. "Pruning a Minimum Spanning Tree," Papers 1109.0642, arXiv.org.
    3. Leonidas Sandoval Junior, 2011. "A Map of the Brazilian Stock Market," Papers 1107.4146, arXiv.org, revised Mar 2013.
    4. Leonidas Sandoval Junior & Italo De Paula Franca, 2011. "Correlation of financial markets in times of crisis," Papers 1102.1339, arXiv.org, revised Mar 2011.
    5. Leonidas Sandoval, 2012. "A Map Of The Brazilian Stock Market," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1-40.

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