New evidence of interdependence in forex markets: A connection of connection analysis

Tao Wu, Xiaotong Sun, Xin Xu, Nanfei Jia and Siyuan Xuan

International Review of Financial Analysis, 2024, vol. 95, issue PA

Abstract: Uncovering the complex connections among components is a fundamental approach to understand underlying mechanisms and then guide decision-making in forex markets. Previous works mainly focused on the connections between currency themselves, this work extends this issue by proposing a novel framework to investigate the connections between currency connections. Selecting ten major traded currencies as samples, we examine the correlations and causations among currency connections under short-, medium- and long-term scales. The main results are: (1) the changes in currency correlations are not only correlated but also causally linked with other currency correlations; (2) there exists stronger causal interactions of currency connections in long-term scales compared with short and median scales; (3) In short-term scale, the correlation between EUR and GBP is key currency connection, while the connection between CAD and CNY is the key currency connection in long-term scale. In summary, revealing the connections of connections in forex markets substantially extends existing works, which provides new useful information to market participants.

Keywords: Connection of connection; Causation; Complex network; Forex markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pa:s1057521924002758

DOI: 10.1016/j.irfa.2024.103343

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