Monitoring correlation structures stability in foreign exchange market

Abstract

In this paper, we analyzed the dynamics of correlation structure in foreign exchange market from year 2000 until year 2012. The time windows are yearly basic. The yearly time windows under study are non-overlapping. To monitor the correlation structures stability in foreign exchange market, the correction statistic of term on Jennrich's statistic is used. The dynamics of correlation structures is showed in the form of control chart. The graph showed that the correlation structures of particular time windows are far different from the pooled correlation structure, especially during the US sub-prime crisis 2007. The results are complied with the real situation of financial markets. To identify the root causes of certain time windows, we employed the minimal spanning tree (MST).