Topology of foreign exchange markets using hierarchical structure methods

Michael Naylor, Lawrence Rose and Brendan J. Moyle

Physica A: Statistical Mechanics and its Applications, 2007, vol. 382, issue 1, 199-208

Abstract: This paper uses two physics derived hierarchical techniques, a minimal spanning tree and an ultrametric hierarchical tree, to extract a topological influence map for major currencies from the ultrametric distance matrix for 1995–2001. We find that these two techniques generate a defined and robust scale free network with meaningful taxonomy. The topology is shown to be robust with respect to method, to time horizon and is stable during market crises. This topology, appropriately used, gives a useful guide to determining the underlying economic or regional causal relationships for individual currencies and to understanding the dynamics of exchange rate price determination as part of a complex network.

Keywords: Minimal spanning tree; Ultrametric hierarchical tree; Taxonomy; Econophysics; Financial markets (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (50)

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Related works:
Working Paper: Topology of Foreign Exchange Markets using Hierarchical Structure Methods (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:382:y:2007:i:1:p:199-208

DOI: 10.1016/j.physa.2007.02.019

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