Determining the long run behaviour of the exchange rate of Libyan Dinar using Markov chain

Abstract

The study of foreign exchange (FOREX) markets is known as foreign currency exchange. These rates provide crucial data to international monetary exchange markets. Using a Markov chain model, this study attempts to determine the behaviour of the Libyan (LYD) currency rate against the US Dollar (USD). Three states are observed. The transition probability matrix and starting state vector are calculated. The result shows that, the probability of being in one of three states, namely, increases, remain the same or decreases are 0.3614, 0.3268 and 0.3118, respectively. The expected number of visits and return time are also obtained.