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Home » Finance Faqs » How do we remove non-stationarity of a time series?

How do we remove non-stationarity of a time series?

The 2 main types of Non-stationarity:

1.Random walk with drift

eg.,

yt = μ + yt-1 + ut

To make the series stationary we need to calculate the first difference series yt-yt-1
This is also called a difference stationary process


2.Deterministic trended time series

eg.,

yt = μ + αt + ut

To make the series stationary we need to detrend the series.
This is also called a trend stationary process

It is important that the we do not detrend a trend stationary process => stationarity will not be removed.
If we detrend a difference stationary process => stationarity will be removed but an MA(1) process gets added to the resulting series.



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