Dimbiniaina Rakotojoelimaria

Dimbiniaina Rakotojoelimaria

Financial Economist and Corporate Banker

Master of Science in Finance, Durham University

Chevening Scholar 2015-2016


When we analyze the exchange rate of the Ariary, we are used to discussing the long story of a non-stop depreciation that produces many devastating consequences on Malagasy lives and households.

This long-run trend of depreciation is only one side of the story. There is another side of the story that depicts a short-run path of MGA/USD and MGA/EUR with high variability, and which is rarely evoked: volatility [1].

As we can notice from figure 1, the Ariary exchange rate displayed many instabilities for both MGA/USD and MGA/EUR couples in 2020[2].

Yet the volatility exhibited by the MGA/EUR is stronger and more numerous than the volatility showed by the MGA/USD pair (16 MGA/EUR spikes vs 12 MGA/USD spikes). Positive volatility is weaker than what is remarked in negative volatility. The extreme value for both exchange rates is more likely to be on the negative side.

Finally, volatility clustering characteristics are observed: substantial changes in prices tend to cluster together and their degree shows some persistence for both MGA/USD and MGA/EUR.

January negative spikes , March cluster, June intense points, and July-August peaks show the strongest burst of volatility with November-December clustering for both exchange rates. And this is valid for positive and negative turbulence alike. 



Another characteristic of the Ariary rarely discussed is the liquidity factor. Obviously, the couple MGA/USD is more liquid as it had a bigger exchanged volume (USD 4.76B) than the MGA/EUR (EUR 2.86B) and had more traded transactions (9,642 operations) than MGA/EUR (7,326 operations).

For the MGA/USD pair, an amount of USD 19.3M was traded on a daily average in 2020 with a maximum of USD 30M and a minimum of USD 10.4M, which gives a range of USD 19.6M. It also has a standard deviation of USD 3.61M which reveals high variability in the traded volume of MGA/USD. In terms of numbers of transactions, 39 transactions were recorded on a daily average for the US dollar, with a range of 30 and 5.26 std.dev.

Compared to that, MGA/EUR had EUR 11.6M average volume exchanged per day with EUR 13.2M of range and std.dev of EUR 2.46M. Regarding the number of transactions, we recorded an average of 30 operations, a range of 20 transactions and a std.dev of 3.98.

For instance, USD is used in 68% of all international trade operations undertaken by Madagascar. That indicates its status as the main exchange currency and demonstrates its importance to our analysis. As such, it is not surprising that the volume of USD traded in the market is bigger than the volume of EUR exchanged. 

Figure 2 shows that during the first month of the year, despite some important peaks – which are also the strongest for 2020, the liquidity of MGA/USD was always below its mean (USD 19.3M). Yet from May to August, it was mostly beyond the mean. It intermittently continues till October. Since then, it moved substantially below its mean in November and December. The same remarks can be drawn for the MGA/EURO at a less significant scale, which from April to October was consistently beyond its mean, denoting high liquid markets, and mostly below the mean from January to March and from October to December.


Figure 3 describes the bid-ask spread [3] of the MGA/USD and MGA/EUR pair for 2020. As we can notice, the bid-ask spread for MGA/USD and MGA/EUR become relatively unstable during the last month of the year 2020, regardless of big illiquidity spikes for the MGA/EUR pair in June and two liquidity spikes in February and October for the MGA/USD couple.

The existing theory predicts that liquidity crashes are associated with extreme price disruptions. During a liquidity crisis, financial market experiences wild price swings which represent elevated level of volatility – and this is confirmed with the Malagasy forex exchange.

We can conclude that 2020 was a stressful period in the forex market with high turbulence for the exchange rate of the Ariary against the Euro and the USD as it leads to excessive level of volatility and to illiquidity spikes.

 We assume our result is directly valuable for policymakers, market regulators, investors and market participants. It can support policymakers and regulators to design better policies on the forex market and target their intervention more efficiently. It will offer investors a better insight on how the Ariary behaves and will help them adapt their trading strategy. For scholars, it will expand a new area of research not well examined till today as, to our best knowledge, this is the first analysis in the field of volatility and liquidity of the Ariary exchange, and the impact of supply and demand shock induced by the Covid-19 outbreak.


[1] Volatility is defined as a tendency to change quickly and unpredictably and also the dispersion of the return of a given financial asset.

[2] Data comes from the public database of the Central Bank of Madagascar and was processed with Eviews12.

[3] The bid-ask spread is the difference between the highest price the seller will offer (the bid price) and the lowest price the buyer will pay (the ask price), it is the de facto measure of liquidity as when there is a significant amount of liquidity in a given market, spread will be tighter.

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