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Currency crises and the evolution of foreign exchange market: Evidence from minimum spanning tree

  • Jang, Wooseok
  • Lee, Junghoon
  • Chang, Woojin
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    We examined the time series properties of the foreign exchange market for 1990–2008 in relation to the history of the currency crises using the minimum spanning tree (MST) approach and made several meaningful observations about the MST of currencies. First, around currency crises, the mean correlation coefficient between currencies decreased whereas the normalized tree length increased. The mean correlation coefficient dropped dramatically passing through the Asian crisis and remained at the lowered level after that. Second, the Euro and the US dollar showed a strong negative correlation after 1997, implying that the prices of the two currencies moved in opposite directions. Third, we observed that Asian countries and Latin American countries moved away from the cluster center (USA) passing through the Asian crisis and Argentine crisis, respectively.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437110008861
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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 390 (2011)
    Issue (Month): 4 ()
    Pages: 707-718

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    Handle: RePEc:eee:phsmap:v:390:y:2011:i:4:p:707-718
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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    1. R. Mantegna, 1999. "Hierarchical structure in financial markets," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 11(1), pages 193-197, September.
    2. G. Bonanno & G. Caldarelli & F. Lillo & S. Micciche` & N. Vandewalle & R. N. Mantegna, 2004. "Networks of equities in financial markets," Papers cond-mat/0401300, arXiv.org.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Cheoljun Eom & Gabjin Oh & Seunghwan Kim, 2007. "Deterministic Factors of Stock Networks based on Cross-correlation in Financial Market," Papers 0705.0076, arXiv.org.
    5. Vincenzo Tola & Fabrizio Lillo & Mauro Gallegati & Rosario N. Mantegna, 2005. "Cluster analysis for portfolio optimization," Papers physics/0507006, arXiv.org.
    6. Ricardo Coehlo & Claire Gilmore & Brian M. Lucey, 2006. "The Evolution of Interdependence in World Equity Markets - Evidence from Minimum Spanning Trees," The Institute for International Integration Studies Discussion Paper Series iiisdp142, IIIS.
    7. Didier, Tatiana & Mauro, Paolo & Schmukler, Sergio L., 2008. "Vanishing financial contagion?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 775-791.
    8. Mizuno, Takayuki & Takayasu, Hideki & Takayasu, Misako, 2006. "Correlation networks among currencies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 364(C), pages 336-342.
    9. Eom, Cheoljun & Oh, Gabjin & Kim, Seunghwan, 2007. "Deterministic factors of stock networks based on cross-correlation in financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(1), pages 139-146.
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