- CFA Exams
- CFA Exam: Level II 2021
- Study Session 2. Quantitative Methods (1)
- Reading 6. Time-Series Analysis
- Subject 5. Autoregressive conditional heteroskedasticity models

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**CFA Practice Question**

ARCH means:

B. The variance of the error term is not constant in all periods.

C. The variance of the error term in one period depends on the variance of the error in previous periods.

D. The covariance of the time series with itself is not constant in all periods.

A. The error term of the current period is correlated with the error term of the previous period.

B. The variance of the error term is not constant in all periods.

C. The variance of the error term in one period depends on the variance of the error in previous periods.

D. The covariance of the time series with itself is not constant in all periods.

Correct Answer: C

In econometrics, an autoregressive conditional heteroskedasticity model considers the variance of the current error term to be a function of the variances of the previous time period's error terms. ARCH relates the error variance to the square of a previous period's error. It is employed commonly in modeling financial time series that exhibit time-varying volatility clustering, i.e., periods of swings followed by periods of relative calm.

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