The dynamic evolution of the characteristics of exchange rate risks in countries along "The Belt and Road" based on network analysis.

Zhewen Liao,Kun Guo,Zhongxing Wang,J E Trinidad Segovia

doi:10.1371/journal.pone.0221874

Abstract

As of November 1, 2018, China's "One Belt and One Road" Initiative has involved 123 countries and promoted worldwide communication, cooperation and trade exchange. This paper constructs correlation networks of exchange rates among the countries along “The Belt and Road” and analyzes the risk contagion structure. It is found that when “The Belt and Road” initiative is initialized, countries in Eastern Europe occupy important positions in the network and play a vital role in the spreading of exchange rate risks; however, during the process of “The Belt and Road” initiative, the exchange rate risks are decentralized geographically, whereas they are centralized in countries that have in-depth communication and cooperation. The minimum Spanning Tree method is also proposed to investigate the structure of complex networks. It is found that the geographical link between exchange rate fluctuations and correlations among the countries has been strengthened while China has become an important node in the exchange rate network after the launch of “The Belt and Road” initiative. In addition, the influence and promotion of RMB has rapidly benefited from the initiative.

Highlights

After the international financial crisis in 2008, the world economy has been recovering slowly
Exclude countries that have not issued their own independent currencies: For the correlation network construction and analysis, countries in the Eurozone where the euro circulates, such as Greece, or currencies that were changed to the euro, such as that of Latvia, were omitted, and the countries in Africa that do not use their own currencies were excluded
From our research it could be concluded that in the “B & R” route, the degree of freedom of exchange rate system mainly has a positive correlation of the financial market openness

Summary

Introduction

After the international financial crisis in 2008, the world economy has been recovering slowly. Trade, financial integration and people bonding[2] In each of these areas, the exchange rate fluctuation is a vitally important factor that needs to be taken into account. “The B & R” connects countries by means of trade and economic cooperation. The increase in construction investment and capital flows has led to variations in currency exchange rates, which influences the trading and economic relationships the other way around. The exchange rate is an important economic variable, especially when considering the trading cooperation between countries. Correlations between exchange rates of different currency pairs display a complex pattern, which provides real-world material for network analysis. The foreign currency market is regarded as a complex system that includes different exchange rates of currency pairs. The properties of the full sample network including all the remaining 115 countries and regions (including Japan, the UK, and the Eurozone) are identified

Exclude countries that have not issued their own independent currencies

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Findings

Conclusions