Topology of the correlation networks among major currencies using hierarchical structure methods

Mustafa Keskin, Bayram Deviren and Yusuf Kocakaplan

Physica A: Statistical Mechanics and its Applications, 2011, vol. 390, issue 4, 719-730

Abstract: We studied the topology of correlation networks among 34 major currencies using the concept of a minimal spanning tree and hierarchical tree for the full years of 2007–2008 when major economic turbulence occurred. We used the USD (US Dollar) and the TL (Turkish Lira) as numeraires in which the USD was the major currency and the TL was the minor currency. We derived a hierarchical organization and constructed minimal spanning trees (MSTs) and hierarchical trees (HTs) for the full years of 2007, 2008 and for the 2007–2008 period. We performed a technique to associate a value of reliability to the links of MSTs and HTs by using bootstrap replicas of data. We also used the average linkage cluster analysis for obtaining the hierarchical trees in the case of the TL as the numeraire. These trees are useful tools for understanding and detecting the global structure, taxonomy and hierarchy in financial data. We illustrated how the minimal spanning trees and their related hierarchical trees developed over a period of time. From these trees we identified different clusters of currencies according to their proximity and economic ties. The clustered structure of the currencies and the key currency in each cluster were obtained and we found that the clusters matched nicely with the geographical regions of corresponding countries in the world such as Asia or Europe. As expected the key currencies were generally those showing major economic activity.

Keywords: Econophysics; Minimal spanning tree; Ultrametric hierarchical tree; Bootstrap; Taxonomy; Foreign exchange market (search for similar items in EconPapers)
Date: 2011
References: View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:390:y:2011:i:4:p:719-730

DOI: 10.1016/j.physa.2010.10.041

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