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Detecting a Currency's Dominance or Dependence using Foreign Exchange Network Trees

Author

Listed:
  • Mark McDonald

    (Oxford University and HSBC Bank)

  • Omer Suleman

    (Oxford University and HSBC Bank)

  • Stacy Williams

    (Oxford University and HSBC Bank)

  • Sam Howison

    (Oxford University and HSBC Bank)

  • Neil F. Johnson

    (Oxford University and HSBC Bank)

Abstract

In a system containing a large number of interacting stochastic processes, there will typically be many non-zero correlation coefficients. This makes it difficult to either visualize the system's inter-dependencies, or identify its dominant elements. Such a situation arises in Foreign Exchange (FX) which is the world's biggest market. Here we develop a network analysis of these correlations using Minimum Spanning Trees (MSTs). We show that not only do the MSTs provide a meaningful representation of the global FX dynamics, but they also enable one to determine momentarily dominant and dependent currencies. We find that information about a country's geographical ties emerges from the raw exchange-rate data. Most importantly from a trading perspective, we discuss how to infer which currencies are `in play' during a particular period of time.

Suggested Citation

  • Mark McDonald & Omer Suleman & Stacy Williams & Sam Howison & Neil F. Johnson, 2004. "Detecting a Currency's Dominance or Dependence using Foreign Exchange Network Trees," Papers cond-mat/0412411, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0412411
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