Definition of 'Autoregressive Conditional Heteroskedasticity - ARCH'

An econometric term used for observed time series. ARCH models are used to model financial time series with time-varying volatility, such as stock prices. The ARCH concept was developed by economist Robert . !ngle, for which he won the "##$ %obel &emorial 'ri(e in !conomic )ciences.

Investopedia explains 'Autoregressive Conditional Heteroskedasticity - ARCH'

ARCH models assume that the variance of the current error term is related to the si(e of the previous periods* error terms, giving rise to volatility clustering. This phenomenon is widely observable in financial markets, where periods of low volatility are followed by periods of high volatility and vice versa. or e+ample, volatility for the ),' -## was unusually low for an e+tended period during the bull market from "##$ to "##., before spiking to record levels during the market correction of "##/. ARCH models have become mainstays of arbitrage pricing and portfolio theory.

Definition

of

'Generalized Conditional
used by financial

AutoRegressive
A statistical model

Heteroskedasticity (GARCH '

institutions to estimate the volatility of stock returns. This information is used by banks to help determine what stocks will potentially provide higher returns, as well as to forecast the returns of current

investments process.

to

help

in

the

budgeting

Investopedia explains 'Generalized AutoRegressive Conditional Heteroskedasticity (GARCH '

There are many variations of 0ARCH, including %0ARCH to include correlation, and 10ARCH which restricts the volatility parameter. !ach model can be used to accomodate the specific 2ualities of the stock, industry or economic state. In statistics and signal processing, an autoregressive (AR) model is a representation of a type of random process; as such, it describes certain time-varying processes in nature, economics, etc. The autoregressive model specifies that the output variable depends linearly on its own previous values. It is a special case of the more general A !A model of time series.

Definition of 'Heteroskedasticity'
1n statistics, when the standard deviations of a variable, monitored over a specific amount of time, are non-constant. Heteroskedasticity often arises in two forms, conditional and unconditional. Conditional heteroskedasticity identifies nonconstant volatility when future periods of high and low volatility cannot be identified. 3nconditional heteroskedasticity is used when futures periods of high and low volatility can be identified.

Investopedia explains 'Heteroskedasticity'

1n finance, conditional heteroskedasticity often is seen in the prices of stocks and bonds. The level of volatility of these e2uities cannot be predicted over any period of time. 3nconditional heteroskedasticity can be used when discussing variables that have identifiable seasonal

variability, such as electricity usage.