Simulating Exchange Rate Volatility in Iran Using Stochastic Differential ‎Equations‎

Subject Areas : International Journal of Industrial Mathematics

P. Fakhraiepour‎ ¹ , P. Nabati ² , R. Taghizadeh ³

1 - Department of Science, Urmia University of Technology, Urmia, Iran.
2 - Department of Science, Urmia University of Technology, Urmia, Iran.
3 - Department of Industrial Engineering, Urmia University of Technology, Urmia, Iran.

Received: 2018-04-27 Accepted : 2018-04-27 Published : 2018-01-01

Keywords: Stochastic differential equati, Geometric Brownian Motion, Volatility of exchange rate, White ‎noise.‎,

Abstract :

‎The main purpose of this paper is to analyze the exchange rate volatility in Iran in the time period between 2011/11/27 and 2017/02/25 on a daily basis. As a tradable asset and as an important and effective economic variable, exchange rate plays a decisive role in the economy of a country. In a successful economic management, the modeling and prediction of the exchange rate volatility is essential for economic policies. Therefore, modeling and forecasting the changes in exchange rates for economic policies is vital. Foreign currency has the particular property of stochastic volatility, which can be modeled as a stochastic differential equation. In order to provide the best model, first, we studied the effectiveness of different stochastic models, drew upon the daily price of the exchange rate, and investigated the performance of these models. Finally, the best model was achieved by taking into account the numerical simulation and the mean square error, Akaikes (AIC), Schwarz’s Bayesian (SBIC), and the Hannan-Quinn (HQIC) ‎criteria.