Future Natural Gas Price Forecasting Model and Its Policy Implication

Ambya Ambya, Toto Gunarto, Ernie Hendrawaty, Fajrin Satria Dwi Kesumah, Febryan Kusuma Wisnu

Abstract


Future natural gas (FNG) price is a collected data over the years and is a volatile movement in the market. In other words, FNG price is categorised as a time series data with volatility in both variance and mean, as well as most likely in some cases having heteroscedasticity problem. To come up with an estimated prediction model, some analysis tools, such as autoregressive integrated moving average (ARIMA) and generalised autoregressive conditional heteroscedasticity (GARCH), are introduced to find the best-fitted model having the smallest error value with high significance of probability value. This study aims to examine the best-fitted model that allows us to forecast FNG prices more accurately in the near future. There are 2842 observed data of daily FNG prices from 2009 to 2019 as the input of study objects. The finding suggests that the first measurement model of ARIMA (1,1,1) does not fit the model as having a non-significant probability value. Thus, it is required to check its heteroscedasticity by conducting an ARCH effect test. It is concluded that a data set has an effect of ARCH, so AR (p)–GARCH (p,q) model is then tested. AR (1)–GARCH (1,1) model is believed to be a best-fitted model having a significant p-value of less than 0.0001 with significantly small  mean squared error and root mean squared error values, indicating that it has a very accurate prediction model. The forecasting model is to adjust the offered recommendation of policy for the government regarding the issue of high volatility of daily FNG prices in the future. We then offer a best-suited policy for some certain governments like Indonesia to give subsidy for targeted users in order to keep increasing their use of FNG that will expectedly affect their marketable product innovation and expansion, so economic growth in Indonesia is maintained.

Keywords: Future Natural Gas Price, Autoregressive Integrated Moving Average, Autoregressive Conditional Heteroscedastic Effect, Generalised Autoregressive Conditional Heteroscedasticity, Subsidy

JEL Classifications: C5, C53, H2, H25, Q4, Q47

DOI: https://doi.org/10.32479/ijeep.9676


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