New evidence of interdependence in forex markets: A connection of connection analysis

Abstract

Uncovering the complex connections among components is a fundamental approach to understand underlying mechanisms and then guide decision-making in forex markets. Previous works mainly focused on the connections between currency themselves, this work extends this issue by proposing a novel framework to investigate the connections between currency connections. Selecting ten major traded currencies as samples, we examine the correlations and causations among currency connections under short-, medium- and long-term scales. The main results are: (1) the changes in currency correlations are not only correlated but also causally linked with other currency correlations; (2) there exists stronger causal interactions of currency connections in long-term scales compared with short and median scales; (3) In short-term scale, the correlation between EUR and GBP is key currency connection, while the connection between CAD and CNY is the key currency connection in long-term scale. In summary, revealing the connections of connections in forex markets substantially extends existing works, which provides new useful information to market participants.