Hands-On Machine Learning for Algorithmic Trading

Adding features – ARMAX

An ARMAX model adds input variables or covariate on the right-hand side of the ARMA time series model (assuming the series is stationary so we can skip differencing):

This resembles a linear regression model but is quite difficult to interpret because the effect of by one unit as in linear regression. Instead, the presence of lagged values of y_t on the right-hand side of the equation implies that the coefficient can only be interpreted given the lagged values of the response variable, which is hardly intuitive.