Analysis of a network structure of the foreign currency exchange market

TL;DR

This paper investigates the structure of the global foreign currency exchange market by analyzing currency networks, identifying clusters, hierarchical structures, and temporal changes, revealing the increasing influence of the euro and instability over time.

Contribution

It introduces a network-based analysis of the FX market using correlation matrices and spanning trees, highlighting the market's hierarchical and evolving nature.

Findings

Currencies form clusters based on economic and geographical factors.

The network exhibits a hierarchical scale-free structure.

The market structure changes over time, with the euro gaining influence.

Abstract

We analyze structure of the world foreign currency exchange (FX) market viewed as a network of interacting currencies. We analyze daily time series of FX data for a set of 63 currencies, including gold, silver and platinum. We group together all the exchange rates with a common base currency and study each group separately. By applying the methods of filtered correlation matrix we identify clusters of closely related currencies. The clusters are formed typically according to the economical and geographical factors. We also study topology of weighted minimal spanning trees for different network representations (i.e., for different base currencies) and find that in a majority of representations the network has a hierarchical scale-free structure. In addition, we analyze the temporal evolution of the network and detect that its structure is not stable over time. A medium-term trend can be identified which affects the USD node by decreasing its centrality. Our analysis shows also an increasing role of euro in the world's currency market.