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ARCH LM Test for Conditional Heteroscedasticity

Medium · time_series · Quant Researcher interview question · arch, lm_test, heteroscedasticity, volatility_clustering, time_series

Engle's ARCH LM test is a standard diagnostic for conditional heteroscedasticity in the residuals of a time-series model. It formally tests for volatility clustering, a common feature of financial asset returns. A significant test statistic suggests the presence of ARCH effects and indicates that a GARCH-family model may be more appropriate for forecasting volatility. Task Implement the function arch_lm_test(residuals: list, lags: int = 1) to perform Engle's ARCH LM test. 1. Compute the square