Using a Markov matrix to predict fluctuations in foreign exchange rates

Abstract

Exchange rates are one of the basic pillars of any economy, because of their role in pricing goods and services, especially imported ones. The fluctuations that occur in exchange rates also have repercussions on the vitality and activity of the market on the one hand and the behaviors of market participants on the other hand. Therefore, forecasting exchange rates gave a margin of safety in making investment decisions and entering the foreign exchange market. There are many methods that have been used over the past years that sought to predict the movement of foreign exchange rates, although they vary in the success rates achieved as a result of using any of the methods. One of these methods is (Markov matrix), as the index numbers in the Markov matrix for exchange rates are one of the oldest and most widely used indicators, as they measure the changes that occur in foreign exchange rates over a specific period of time, so studying their impact on the economic situation of the country is of great importance. Because of its direct relationship to economic development and social welfare, predicting the movement and direction of exchange rates in the future provides the opportunity for traders to develop strategies that help them achieve the desired profit on the one hand and avoid them from the specter of potential losses on the other hand. The main goal of this research is to predict the direction of the index numbers of foreign exchange rates (euro - dollar) using Markov chains as one of the statistical methods in forecasting data in the present time, as the matrix of transitional probabilities was estimated using the maximum likelihood method that was applied Based on weekly data taken from approved sources Globally for the period from (1/1/2016) until (12/31/2020) because this period witnessed a number of fluctuations in exchange rates (euro - dollar) and also witnessed the spread of the Corona virus and the almost complete cessation of all life facilities.
Through the forecast results, an important conclusion was reached, which is that all index numbers for foreign exchange rates (euro - dollar) will witness a noticeable increase and then will decrease, indicating that the effects of the Corona crisis will reach foreign exchange rates (euro - dollar) in the future.