What shakes the FX tree? Understanding currency dominance, dependence, and dynamics

Neil F. Johnson; Mark McDonald; Omer Suleman; Stacy Williams; Sam Howison

doi:10.1117/12.618875

23 May 2005 What shakes the FX tree? Understanding currency dominance, dependence, and dynamics (Keynote Address)

Neil F. Johnson, Mark McDonald, Omer Suleman, Stacy Williams, Sam Howison

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Proceedings Volume 5848, Noise and Fluctuations in Econophysics and Finance; (2005) https://doi.org/10.1117/12.618875
Event: SPIE Third International Symposium on Fluctuations and Noise, 2005, Austin, Texas, United States

Abstract

There is intense interest in understanding the stochastic and dynamical properties of the global Foreign Exchange (FX) market, whose daily transactions exceed one trillion US dollars. This is a formidable task since the FX market is characterized by a web of fluctuating exchange rates, with subtle inter-dependencies which may change in time. In practice, traders talk of particular currencies being 'in play' during a particular period of time -- yet there is no established machinery for detecting such important information. Here we apply the construction of Minimum Spanning Trees (MSTs) to the FX market, and show that the MST can capture important features of the global FX dynamics. Moreover, we show that the MST can help identify momentarily dominant and dependent currencies.

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Neil F. Johnson, Mark McDonald, Omer Suleman, Stacy Williams, and Sam Howison "What shakes the FX tree? Understanding currency dominance, dependence, and dynamics (Keynote Address)", Proc. SPIE 5848, Noise and Fluctuations in Econophysics and Finance, (23 May 2005); https://doi.org/10.1117/12.618875

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