Financial Risk Manager Part 1
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A newly hired analyst at an investment bank is using an autoregressive moving average (ARMA) process to model equity returns data. In addition to conducting a visual inspection to assess the model fit, the analyst decides to validate the model by testing for autocorrelation and considers using either the Ljung-Box test statistic or the Box-Pierce test statistic. Which of the following correctly describes these two test statistics?
A
The Box-Pierce test statistic is equal to the sum of the squared autocorrelations scaled by the sample size.
B
The Box-Pierce test statistic is the sum of autocorrelations that follow a converging Chi-square distribution.
C
Unlike the Box-Pierce test statistic, the Ljung-Box test statistic follows an asymptotic standard normal distribution.
D
Unlike the Box-Pierce test, the Ljung-Box test does not assume that the estimated model residuals follow a white noise process.