Is the world small enough? — A view from currencies

Abstract

Exchange rates are important indicators of the economic power of countries, directly affected by the international trading patterns and relations. Since almost every pair of countries in the globalized world are economically and financially related, exchange rates can be evaluated as nodes of a global financial network to make meaningful inferences. In this study, a financial network approach is conducted by evaluating the movements of the most traded 35 currencies against gold between years 2005 and 2017. Using graph theory and statistical methods, the analysis of economic relations between currencies is carried out, supported with geographical and cultural inferences. A risk map of currencies is generated through the portfolio optimization. Another approach of applying various threshold levels for correlations to determine connections between currencies is also employed. Results indicate that there exists a saddle point for correlation threshold as 0.9 which results in a robust network topology that is highly modular and clustered, also dominantly displaying small-world and scale-free properties.