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Analysis of a network structure of the foreign currency exchange market

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  • Jaroslaw Kwapien
  • Sylwia Gworek
  • Stanislaw Drozdz
  • Andrzej Gorski
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    Abstract

    We analyze structure of the world foreign currency exchange (FX) market viewed as a network of interacting currencies. We analyze daily time series of FX data for a set of 63 currencies, including gold, silver and platinum. We group together all the exchange rates with a common base currency and study each group separately. By applying the methods of filtered correlation matrix we identify clusters of closely related currencies. The clusters are formed typically according to the economical and geographical factors. We also study topology of weighted minimal spanning trees for different network representations (i.e., for different base currencies) and find that in a majority of representations the network has a hierarchical scale-free structure. In addition, we analyze the temporal evolution of the network and detect that its structure is not stable over time. A medium-term trend can be identified which affects the USD node by decreasing its centrality. Our analysis shows also an increasing role of euro in the world's currency market.

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    File URL: http://arxiv.org/pdf/0906.0480
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 0906.0480.

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    Date of creation: Jun 2009
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    Publication status: Published in J. Econ. Interact. Coord. 4, 55-72 (2009)
    Handle: RePEc:arx:papers:0906.0480

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    Web page: http://arxiv.org/

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    References

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    1. S. Drozdz & J. Kwapien & F. Gruemmer & F. Ruf & J. Speth, 2002. "Are the contemporary financial fluctuations sooner converging to normal?," Papers cond-mat/0208240, arXiv.org, revised Jul 2003.
    2. A. Z. Górski & S. Drożdż & J. Kwapień, 2008. "Scale free effects in world currency exchange network," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 66(1), pages 91-96, November.
    3. Rosario N. Mantegna, 1998. "Hierarchical Structure in Financial Markets," Papers cond-mat/9802256, arXiv.org.
    4. A. Z. Gorski & S. Drozdz & J. Kwapien, 2008. "Scale free effects in world currency exchange network," Papers 0810.1215, arXiv.org.
    5. S. Drozdz & M. Forczek & J. Kwapien & P. Oswiecimka & R. Rak, 2007. "Stock market return distributions: from past to present," Papers 0704.0664, arXiv.org.
    6. Drożdż, S. & Forczek, M. & Kwapień, J. & Oświe¸cimka, P. & Rak, R., 2007. "Stock market return distributions: From past to present," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(1), pages 59-64.
    7. S. Drożdż & A. Z. Górski & J. Kwapień, 2007. "World currency exchange rate cross-correlations," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 58(4), pages 499-502, 08.
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    Cited by:
    1. Sandoval, Leonidas, 2014. "To lag or not to lag? How to compare indices of stock markets that operate on different times," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 403(C), pages 227-243.
    2. Sandoval, Leonidas Junior, 2013. "To lag or not to lag? How to compare indices of stock markets that operate at different times," Insper Working Papers wpe_319, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    3. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2012. "Stock market networks: The dynamic conditional correlation approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(16), pages 4147-4158.
    4. Leonidas Sandoval Junior, 2011. "A Map of the Brazilian Stock Market," Papers 1107.4146, arXiv.org, revised Mar 2013.
    5. Sandoval, Leonidas & Franca, Italo De Paula, 2012. "Correlation of financial markets in times of crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(1), pages 187-208.
    6. Feng, Xiaobing & Hu, Haibo & Wang, Xiaofan, 2010. "The evolutionary synchronization of the exchange rate system in ASEAN+6," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(24), pages 5785-5793.
    7. Sandoval, Leonidas, 2012. "Pruning a minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2678-2711.
    8. Leonidas Sandoval Junior, 2011. "Pruning a Minimum Spanning Tree," Papers 1109.0642, arXiv.org.
    9. Leonidas Sandoval Junior, 2011. "Cluster formation and evolution in networks of financial market indices," Papers 1111.5069, arXiv.org.

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