Modeling the stochastic volatility of MAD/EURO and MAD/USD the exchange rates by the Bayesian approach and the MCMC (Monte Carlo Markov Chain) algorithm

Abstract

Purpose

One of the crucial issues in the contemporary finance is the prediction of the volatility of financial assets. In this paper, the authors are interested in modelling the stochastic volatility of the MAD/EURO and MAD/USD exchange rates.

Design/methodology/approach

For this purpose, the authors have adopted Bayesian approach based on the MCMC (Monte Carlo Markov Chain) algorithm which permits to reproduce the main stylized empirical facts of the assets studied. The data used in this study are the daily historical series of MAD/EURO and MAD/USD exchange rates covering the period from February 2, 2000, to March 3, 2017, which represent 4,456 observations.

Findings

By the aid of this approach, the authors were able to estimate all the random parameters of the stochastic volatility model which permit the prediction of the future exchange rates. The authors also have simulated the histograms, the posterior densities as well as the cumulative averages of the model parameters. The predictive efficiency of the stochastic volatility model for Morocco is capable to facilitate the management of the exchange rate in more flexible exchange regime to ensure better targeting of monetary and exchange policies.

Originality/value

To the best of the authors’ knowledge, the novelty of the paper lies in the production of a tool for predicting the evolution of the Moroccan exchange rate and also the design of a tool for the monetary authorities who are today in a proactive conception of management of the rate of exchange. Cyclical policies such as monetary policy and exchange rate policy will introduce this type of modelling into the decision-making process to achieve a better stabilization of the macroeconomic and financial framework.

Citation

Zakaria, F. and Benbachir, A. (2023), "Modeling the stochastic volatility of MAD/EURO and MAD/USD the exchange rates by the Bayesian approach and the MCMC (Monte Carlo Markov Chain) algorithm", Journal of Modelling in Management, Vol. 18 No. 5, pp. 1498-1528. https://doi.org/10.1108/JM2-04-2021-0099