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Structure and evolution of the foreign exchange networks

Author

Listed:
  • Jaroslaw Kwapien
  • Sylwia Gworek
  • Stanislaw Drozdz

Abstract

We investigate topology and temporal evolution of the foreign currency exchange market viewed from a weighted network perspective. Based on exchange rates for a set of 46 currencies (including precious metals), we construct different representations of the FX network depending on a choice of the base currency. Our results show that the network structure is not stable in time, but there are main clusters of currencies, which persist for a long period of time despite the fact that their size and content are variable. We find a long-term trend in the network's evolution which affects the USD and EUR nodes. In all the network representations, the USD node gradually loses its centrality, while, on contrary, the EUR node has become slightly more central than it used to be in its early years. Despite this directional trend, the overall evolution of the network is noisy.

Suggested Citation

  • Jaroslaw Kwapien & Sylwia Gworek & Stanislaw Drozdz, 2009. "Structure and evolution of the foreign exchange networks," Papers 0901.4793, arXiv.org.
  • Handle: RePEc:arx:papers:0901.4793
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    File URL: http://arxiv.org/pdf/0901.4793
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    References listed on IDEAS

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    1. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    2. Debreu, Gerard, 1991. "The Mathematization of Economic Theory," American Economic Review, American Economic Association, vol. 81(1), pages 1-7, March.
    3. Cross, Rod & Strachan, Douglas, 1997. "On George Soros and Economic Analysis," Kyklos, Wiley Blackwell, vol. 50(4), pages 561-574.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    5. K. Vela Velupillai, 2005. "The unreasonable ineffectiveness of mathematics in economics," Cambridge Journal of Economics, Oxford University Press, vol. 29(6), pages 849-872, November.
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. Beed, Clive & Kane, Owen, 1991. "What Is the Critique of the Mathematization of Economics?," Kyklos, Wiley Blackwell, vol. 44(4), pages 581-612.
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    Citations

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    Cited by:

    1. Sandoval, Leonidas, 2012. "Pruning a minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2678-2711.
    2. Leonidas Sandoval Junior, 2011. "A Map of the Brazilian Stock Market," Papers 1107.4146, arXiv.org, revised Mar 2013.
    3. Wang, Gang-Jin & Xie, Chi & Han, Feng & Sun, Bo, 2012. "Similarity measure and topology evolution of foreign exchange markets using dynamic time warping method: Evidence from minimal spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(16), pages 4136-4146.
    4. Leonidas Sandoval Junior, 2011. "Cluster formation and evolution in networks of financial market indices," Papers 1111.5069, arXiv.org.
    5. Kazemilari, Mansooreh & Djauhari, Maman Abdurachman, 2015. "Correlation network analysis for multi-dimensional data in stocks market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 62-75.
    6. Gautier Marti & Frank Nielsen & Miko{l}aj Bi'nkowski & Philippe Donnat, 2017. "A review of two decades of correlations, hierarchies, networks and clustering in financial markets," Papers 1703.00485, arXiv.org, revised Sep 2017.
    7. He, Fang & Chen, Xi, 2016. "Credit networks and systemic risk of Chinese local financing platforms: Too central or too big to fail?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 158-170.
    8. Stosic, Darko & Stosic, Dusan & Ludermir, Teresa & Stosic, Tatijana, 2016. "Correlations of multiscale entropy in the FX market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 457(C), pages 52-61.
    9. 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.
    10. 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.
    11. Mansooreh Kazemilari & Maman Abdurachman Djauhari & Zuhaimy Ismail, 2016. "Foreign Exchange Market Performance: Evidence from Bivariate Time Series Approach," Papers 1608.07694, arXiv.org.
    12. Leonidas Sandoval Junior, 2011. "Pruning a Minimum Spanning Tree," Papers 1109.0642, arXiv.org.
    13. repec:anm:alpnmr:v:5:y:2016:i:1:p:163-169 is not listed on IDEAS
    14. 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.

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