Evolution of Developed Equity and Foreign Exchange Markets: The Minimum Spanning Tree Approach

30 Pages Posted: 11 Aug 2009

See all articles by Fotios Harmantzis

Fotios Harmantzis

FX Concepts

Linyan Miao

Stevens Institute of Technology

Date Written: August 10, 2009

Abstract

This paper investigates the structure and evolution of developed equity and foreign exchange markets by employing a Minimum Spanning Tree (MST) technique. We examine how the trees evolve over the period from 2001 to 2008, covering two recent U.S. economic recessions. Comparing the MSTs based on different periods of time, we explore how the structure of these two markets evolves historically. Diverse benchmarks, such as the US Dollar, Euro, Japanese Yen, Gold, and, Oil, have been used to construct the currency MSTs. The time-varying features of the MSTs have been studied from different perspectives including the statistic measures of rolling-window MST distances, central vertices, and survival ratios. Our empirical results support the belief that the MST is able to identify a network with meaningful taxonomy. Both the Eurozone and Australia have played core roles in equity and in foreign exchange rate markets. Moreover, the survival ratio is prone to be negatively correlated with the window size that is used to construct the MSTs. Finally, the VIX is found to affect some MST distance measures and the survival ratios for specific window sizes.

Keywords: Global equity markets, Foreign exchange, Minimum Spanning Tree, Clusters, VIX

JEL Classification: F31, P51

Suggested Citation

Harmantzis, Fotios and Miao, Linyan, Evolution of Developed Equity and Foreign Exchange Markets: The Minimum Spanning Tree Approach (August 10, 2009). Available at SSRN: https://ssrn.com/abstract=1397650 or http://dx.doi.org/10.2139/ssrn.1397650

Fotios Harmantzis (Contact Author)

FX Concepts

New York, NY 10122

Linyan Miao

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

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