Minimum Spanning Trees and BIS Trade Weighted Indices…

I have always been keen on clustering methods as they are a practical way to visualise meaningful relationships that may exist in the somehow chaotic financial markets….. I thought that I would apply such methodology to the trade weighted indices published by the BIS. Obviously this could easily be used within other context such as multi-asset, macro-fundamentals etc….if you want a natter about this or just to exchange some ideas on the subject, contact me at Pierre@argonautae.co.uk

The following charts look how the monthly changes in the Trade weighted indices have correlated since January 2000.

plot of chunk correlation

The below plot the minimum spanning tree for the TWI indices. The distance between the nodes being a function of the above correlations. Some groupings are quite intuitive…some other less so…