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Hierarchical cluster-tendency analysis of the group structure in the foreign exchange market

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Abstract

A hierarchical cluster-tendency (HCT) method in analyzing the group structure of networks of the global foreign exchange (FX) market is proposed by combining the advantages of both the minimal spanning tree (MST) and the hierarchical tree (HT). Fifty currencies of the top 50 World GDP in 2010 according to World Bank’s database are chosen as the underlying system. By using the HCT method, all nodes in the FX market network can be “colored” and distinguished. We reveal that the FX networks can be divided into two groups, i.e., the Asia-Pacific group and the Pan-European group. The results given by the hierarchical cluster-tendency method agree well with the formerly observed geographical aggregation behavior in the FX market. Moreover, an oil-resource aggregation phenomenon is discovered by using our method. We find that gold could be a better numeraire for the weekly-frequency FX data.

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Authors and Affiliations

  1. Department of Physics and the Beijing-Hong Kong-Singapore Joint Center for Nonlinear and Complex Systems, Beijing Normal University, Beijing, 100875, China

    Xin-Ye Wu & Zhi-Gang Zheng

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  1. Xin-Ye Wu
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  2. Zhi-Gang Zheng
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Correspondence to Zhi-Gang Zheng.

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Wu, XY., Zheng, ZG. Hierarchical cluster-tendency analysis of the group structure in the foreign exchange market. Front. Phys. 8, 451–460 (2013). https://doi.org/10.1007/s11467-013-0346-4

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  • DOI: https://doi.org/10.1007/s11467-013-0346-4

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