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Dynamical clustering of exchange rates |
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| Authors: | Daniel J. Fenn Mason A. Porter Peter J. Mucha Mark McDonald Stacy Williams Neil F. Johnson |
| Affiliation: | 1. Mathematical and Computational Finance Group , Mathematical Institute, University of Oxford , Oxford OX1 3LB , UK;2. CABDyN Complexity Centre , University of Oxford , Oxford OX1 1HP , UK dan.fenn@hsbcib.com;4. Oxford Centre for Industrial and Applied Mathematics , Mathematical Institute, University of Oxford , Oxford OX1 3LB , UK;5. CABDyN Complexity Centre , University of Oxford , Oxford OX1 1HP , UK;6. Carolina Center for Interdisciplinary Applied Mathematics, Department of Mathematics , University of North Carolina , Chapel Hill , NC 27599 , USA;7. Institute for Advanced Materials, Nanoscience and Technology , University of North Carolina , Chapel Hill , NC 27599 , USA;8. FX Research and Trading Group, HSBC Bank, 8 Canada Square, London E14 5HQ , UK;9. Physics Department , University of Miami , Florida , Coral Gables 33146 , USA |
| Abstract: | We use techniques from network science to study correlations in the foreign exchange (FX) market during the period 1991–2008. We consider an FX market network in which each node represents an exchange rate and each weighted edge represents a time-dependent correlation between the rates. To provide insights into the clustering of the exchange-rate time series, we investigate dynamic communities in the network. We show that there is a relationship between an exchange rate's functional role within the market and its position within its community and use a node-centric community analysis to track the temporal dynamics of such roles. This reveals which exchange rates dominate the market at particular times and also identifies exchange rates that experienced significant changes in market role. We also use the community dynamics to uncover major structural changes that occurred in the FX market. Our techniques are general and will be similarly useful for investigating correlations in other markets. |
| Keywords: | Foreign exchange market Networks Community detection |