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Topology of the correlation networks among major currencies using hierarchical structure methods
Authors:Mustafa Keskin  Bayram DevirenYusuf Kocakaplan
Institution:
  • a Department of Physics, Erciyes University, 38039 Kayseri, Turkey
  • b Department of Physics, Nevsehir University, 50300 Nevsehir, Turkey
  • c Institute of Science, Erciyes University, 38039 Kayseri, Turkey
  • Abstract:We studied the topology of correlation networks among 34 major currencies using the concept of a minimal spanning tree and hierarchical tree for the full years of 2007-2008 when major economic turbulence occurred. We used the USD (US Dollar) and the TL (Turkish Lira) as numeraires in which the USD was the major currency and the TL was the minor currency. We derived a hierarchical organization and constructed minimal spanning trees (MSTs) and hierarchical trees (HTs) for the full years of 2007, 2008 and for the 2007-2008 period. We performed a technique to associate a value of reliability to the links of MSTs and HTs by using bootstrap replicas of data. We also used the average linkage cluster analysis for obtaining the hierarchical trees in the case of the TL as the numeraire. These trees are useful tools for understanding and detecting the global structure, taxonomy and hierarchy in financial data. We illustrated how the minimal spanning trees and their related hierarchical trees developed over a period of time. From these trees we identified different clusters of currencies according to their proximity and economic ties. The clustered structure of the currencies and the key currency in each cluster were obtained and we found that the clusters matched nicely with the geographical regions of corresponding countries in the world such as Asia or Europe. As expected the key currencies were generally those showing major economic activity.
    Keywords:Econophysics  Minimal spanning tree  Ultrametric hierarchical tree  Bootstrap  Taxonomy  Foreign exchange market
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