ARCH Test

Name one statistical test for checking for heteroskedasticity and explain it briefly.

Answer

One common test is the Engle’s ARCH test. It checks whether the variance of the residuals depends on past squared residuals, indicating time‐varying volatility. The null hypothesis is that the residuals have constant variance (no ARCH effects). A small \(p\)-value, hence, indicates the presence of heteroskedasticity.

Another, simpler, (graphical) test is to plot the residuals as a function of time and check whether their variance changes over time.

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