Topology of Foreign Exchange Markets Using Hierarchical Structure Methods

12 Pages Posted: 10 Aug 2006

See all articles by Michael Naylor

Michael Naylor

Massey University - School of Economics and Finance

Lawrence C. Rose

Massey University

Brendan J. Moyle

Massey University - Department of Commerce

Date Written: August 2006

Abstract

This paper uses two common physics techniques, a minimal spanning tree and an ultrametric hierarchical tree, to extract a topological influence map for major currencies from the ultrametric distance matrix. We find that these two techniques generate a defined and robust scale free network with meaningful taxonomy, which is fundamentally different from that obtained from stock market topology. The topology is shown to be robust with respect to method, to time horizon and is stable during market crises. This topology gives a guide to determining the underlying economic or regional causal relationships for individual currencies and will prove useful 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

JEL Classification: C00, F31, G15

Suggested Citation

Naylor, Michael and Rose, Lawrence (Larry) Craig and Moyle, Brendan J., Topology of Foreign Exchange Markets Using Hierarchical Structure Methods (August 2006). Available at SSRN: https://ssrn.com/abstract=923308 or http://dx.doi.org/10.2139/ssrn.923308

Michael Naylor (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Lawrence (Larry) Craig Rose

Massey University ( email )

Private Bag 102-904
North Shore Mail Centre
Auckland, 0745
New Zealand
+64 9 4140800, ex 9558 (Phone)
+64 9 441 8150 (Fax)

Brendan J. Moyle

Massey University - Department of Commerce ( email )

Auckland
New Zealand

Register to save articles to
your library

Register

Paper statistics

Downloads
239
Abstract Views
1,294
rank
127,251
PlumX Metrics