Time Evolution of Non-linear Currency Networks

TL;DR

This paper introduces a method to analyze currency networks over time using non-linear dependence measures and short-term windows, revealing dynamic structural changes in currency relationships from 2002 to 2013.

Contribution

It develops a novel approach combining non-linear dependence measures with a moving window technique to study the evolution of currency networks over time.

Findings

Networks show significant temporal variation in structure.

Degree distributions correlate with economic events.

Non-linear measures capture relationships missed by linear methods.

Abstract

Financial markets are complex adaptive systems, and are commonly studied as complex networks. Most of such studies fall short in two respects: they do not account for non-linearity of the studied relationships, and they create one network for the whole studied time series, providing an average picture of a very long, economically non-homogeneous, period. In this study we look at the currency markets by creating networks which can account for non-linearity in the underlying relationships, and are based on short time horizons with the use of running window approach. Since information--theoretic measures are slow to converge, we use Hirschfeld-Gebelein-Renyi Maximum Correlation Coefficient as a measure of the relationships between currencies. We use the Randomized Dependence Coefficient (RDC) as an estimator of the above. It measures the dependence between random samples as the largest canonical correlation between k randomly chosen non-linear projections of their copula transformations. On this basis we create full graphs, and further filter them into minimally spanning trees. We create such networks for each window moving along the studied time series, and analyse the time evolution of various network characteristics, particularly the degree distributions, and their economic significance. We apply this procedure to a dataset describing logarithmic changes in exchange rates in relation to silver for 27 world currencies for the years between 2002 and 2013.