What shakes the FX tree? Understanding currency dominance, dependence and dynamics

Neil F. Johnson, Mark McDonald, Omer Suleman, Stacy Williams and Sam Howison
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Neil F. Johnson: Oxford University and HSBC Bank
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

Papers from arXiv.org

Abstract: There is intense interest in understanding the stochastic and dynamical properties of the global Foreign Exchange (FX) market, whose daily transactions exceed one trillion US dollars. This is a formidable task since the FX market is characterized by a web of fluctuating exchange rates, with subtle inter-dependencies which may change in time. In practice, traders talk of particular currencies being 'in play' during a particular period of time -- yet there is no established machinery for detecting such important information. Here we apply the construction of Minimum Spanning Trees (MSTs) to the FX market, and show that the MST can capture important features of the global FX dynamics. Moreover, we show that the MST can help identify momentarily dominant and dependent currencies.

Date: 2005-03
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:physics/0503014

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