ARMA Models and ARCH Testing
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- Autoregressive Moving Average Model (ARMA) = calculates an average value over a period of time to smooth fluctuations in a time series.
- ARMA models are very sensitive to minor changes and may rarely forecast well.
- Auto Regressive Conditional Heteroskedasticity (ARCH) testing = can be used to determine if an AR, MA, or ARMA model suffers from conditional heteroskedasticity.
- The ARCH test models the error terms and if its slope is statistically significant, then the predictive AR, MA, or ARMA model under scrutiny is not valid.