ARMA Models and ARCH Testing

  • 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.