MFEFM ASSIGNMENT Group 8

Introduction
After modeling the peak electricity demand data using ARMA, we now attempt to
model the time varying volatility present in the time series and forecast the future
demand

Data Description
Data consist of the following variables:

MW Hourly Peak load demand for electricity during the month of December, 2015
in Delhi

No. of data points: 744 (24 hours * 31 days)

MW
30,000

28,000

26,000

24,000

22,000

20,000

18,000
100 200 300 400 500 600 700

Empirical Analysis
ARIMA modeling:

The ARIMA model suitable for the given data series was found to be ARMA(3,0,0)
(1,1,1)24. However, on analyzing the residuals resulting from the model, following
pattern was observed:
 4,000

2,000

3,000 0

2,000
-2,000

1,000
-4,000
0

-1,000

-2,000
100 200 300 400 500 600 700

Residual Actual Fitted

Checking for Heteroscedasticity:

They were then checked for Heteroscedasticity in the residual series. Using the
ARCH type of test at lag 1, the following output was obtained:
Heteroskedasticity Test: ARCH

F-statistic 20.77191 Prob. F(1,717) 0.0000

Obs*R-squared 20.24339 Prob. Chi-Square(1) 0.0000

Basis the p-value, we can reject the null hypothesis that there is no ARCH effect
present in the residual series, implying that ARCH effect is present.

EGARCH modeling:

Since, the residuals are heteroscedastic, we would now proceed to model it using
the EGARCH (Exponential Generalized Autoregressive Conditional
Heteroscedasticity) family of models for volatility modelling. In the EGARCH model,
no restrictions of non-negativity need to be imposed on for the estimation as
opposed to the GARCH model.

After running an EGARCH(1,1) model in EViews, the following estimation output was
obtained:
Dependent Variable: D(MW,0,24)
Method: ML ARCH - Normal distribution (BFGS / Marquardt steps)
Date: 10/28/16 Time: 23:13
Sample (adjusted): 52 744
Included observations: 693 after adjustments
Convergence achieved after 91 iterations
Coefficient covariance computed using outer product of gradients
MA Backcast: 28 51
Presample variance: backcast (parameter = 0.7)
LOG(GARCH) = C(7) + C(8)*ABS(RESID(-1)/@SQRT(GARCH(-1))) + C(9)
*RESID(-1)/@SQRT(GARCH(-1)) + C(10)*LOG(GARCH(-1))

Variable Coefficient Std. Error z-Statistic Prob.

C 44.11253 10.46191 4.216488 0.0000

AR(1) 0.493870 0.042918 11.50717 0.0000
AR(2) 0.137267 0.046081 2.978815 0.0029
AR(3) 0.127906 0.043010 2.973845 0.0029
SAR(24) 0.096575 0.037489 2.576105 0.0100
MA(24) -0.937684 0.009522 -98.47104 0.0000

Variance Equation

C(7) 11.35029 4.084495 2.778872 0.0055

C(8) 0.230686 0.083211 2.772281 0.0056
C(9) -0.077740 0.051635 -1.505567 0.1322
C(10) 0.054983 0.336275 0.163505 0.8701

R-squared 0.697512 Mean dependent var -5.835498

Adjusted R-squared 0.695311 S.D. dependent var 818.1597
S.E. of regression 451.6132 Akaike info criterion 15.06695
Sum squared resid 1.40E+08 Schwarz criterion 15.13248
Log likelihood -5210.699 Hannan-Quinn criter. 15.09230
Durbin-Watson stat 2.016128

Further, a heteroscedasticity test was run on the model. The following output was
obtained:
Heteroskedasticity Test: ARCH

F-statistic 0.527029 Prob. F(1,690) 0.4681

Obs*R-squared 0.528153 Prob. Chi-Square(1) 0.4674

The p-value obtained thus lead us to accept the null hypothesis that the residuals
are not heteroscedastic. The error variance is therefore homoscedastic.

The result indicates that there is no asymmetry effect as the asymmetry coefficient
is statistically insignificant at 95% confidence level. Similarly, the coefficient for
persistence is also statistically insignificant at 95% level implying that the volatility
shocks in the series do not persist for long.

Based on the model ARIMA(3,0,0)(1,1,1) 24-EGARCH(1,1) the peak demand was

forecast using static forecast. The following output was obtained:
 30,000
Forecast: MWF
28,000 Actual: MW
Forecast sample: 720 744
26,000 Included observations: 25
Root Mean Squared Error 450.2104
24,000 Mean Absolute Error 375.4359
Mean Abs. Percent Error 1.543307
22,000 Theil Inequality Coefficient 0.009157
Bias Proportion 0.137540
20,000 Variance Proportion 0.002723
720 725 730 735 740
Covariance Proportion 0.859738
Theil U2 Coefficient 0.404612
MWF 2 S.E.
Symmetric MAPE 1.532978

320,000

280,000

240,000

200,000

160,000
720 725 730 735 740

Forecast of Variance

With MAPE of 1.54% the demand can be predicted quite accurately along with the
expected variances.