Interview Question: Strikes Against ARIMA

Sample Question #134 (econometrics – time series)

As you probably know, ARIMA models are popular in financial econometrics. Can you name one or two disadvantages of ARIMA modeling?

(Comment: many quant interviewers like to ask you questions regarding what’s behind some famous models or techniques, such as what assumptions are needed, and what advantages or disadvantages the model may have)

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One Response to Interview Question: Strikes Against ARIMA

  1. Brett says:

    ANSWER
     
    ARIMA models are popular because they’re flexible – they provide a general time-series framework which can capture many different kinds of time series models via parameter selection. But herein also lies its major disadvantage: it is easy for the quant to blindly curve-fit the data with an ARIMA model and end up having a completely wrong model (e.g., incorrect parameters, or incorrect specification).
     

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