University of Oxford

Statistical Methods
Autocorrelation
Non-Stationary Series
Dr.

Orlaith Burke
Michaelmas Term, 2011
Department of Statistics, 1 South Parks Road,
Oxford OX1 3TG
Contents
1 Non-Stationary Time Series 1
1.1 Phenomenology of Non-Stationarity . . . . . . . . . . . . . . . . . 1
1.2 Trend Stationary vs Dierence Stationary . . . . . . . . . . . . . 3
1
1
Non-Stationary Time Series
In Section I we examined several dierent ARIMA models. We determined
conditions under which these models were stationary. Having imposed these
stationarity conditions we then computed ACF functions for each model. In this
chapter we will examine some models for non-stationary series.
1.1 Phenomenology of Non-Stationarity
In this section we will consider some of the implications of non-stationarity. A
stationary series has a well-dened mean around which it can uctuate with
constant nite variance. This is not necessarily true for a non-stationary series.
The issues involved can best be illustrated by example. Consider the AR(1)
model
y
t
=

1
r

y
t1
+
t
, t = 1, 2, 3, . . . . (1.1)
This is equivalent to

1
1
r
B

y
t
=
t
, t = 1, 2, 3, . . . , (1.2)
1
1. NON-STATIONARY TIME SERIES 2
and the characteristic polynomial (1
1
r
z) has root z = r. The series behaves
dierently according to whether r > 1, r = 1 or r < 1. Equation (1.2) has
solution:
y
t
=
t
+
1
r

t1
+ . . . +
1
r
t1

1
+
1
r
t
y
0
(1.3)
where y
0
is the value of y
t
at t = 0.
It is clear that when r > 1 the inuence of the initial term

1
r
t

y
0
and the
impulses

1
r
i

ti
die out as they move further into the past.
For r > 1 therefore we see that the present is more important than the past.
For these values of r the series is stationary and its behaviour will consist of
oscillation around the mean value 0.
When r = 1 past shocks and the initial value have the same weight, the past
being as important as the present.
And for r < 1 the weights on past terms increase with t, the past is more
important than the present. Here the series rapidly diverges towards + or
. This behaviour is termed explosive and is of course counter-intuitive in
almost all situations. For that reason we safely assume that in time series models
of real life data all roots are either on or outside the unit circle.
1. NON-STATIONARY TIME SERIES 3
1.2 Trend Stationary vs Dierence Stationary
We have seen in the last chapter that dierencing certain non-stationary time
series can produce stationary series.
For example if y
t
is an ARIMA(p, d, q) process where the p roots of the AR
characteristic equation are all outside the unit circle then this series y
t
will be
non-stationary because of the presence of the d unit roots in the model.
If however we consider the dierenced series z
t
=
d
y
t
, this series will be stationary
as all p of the roots of its AR characteristic equation are greater than one in
magnitude.
Instead of dierencing a series to achieve stationarity one might think of removing
a polynomial trend from y
t
to leave a stationary series. In fact this technique
works for some series but not for others.
Consider the series
y
t
= + t +
t
,
t
IID white noise. (1.4)
If we remove the linear term +t from this series y
t
then the series z
t
= y
t
t
with which we are left is clearly a stationary series :
z
t
=
t
. (1.5)
Of course dierencing this series would also leave a stationary series. This can
1. NON-STATIONARY TIME SERIES 4
be seen from the following:
y
t
= + t +
t
y
t1
= + (t 1) +
t1
(1.6)

y
t
= +
t
(1.7)
Patently this dierenced series y
t
is stationary.
Nomenclature
Before proceeding we note the following:
Drift: Constant terms included in time series models such as in (1.4) are
referred to as Drift terms.
Trend: Constant multiples of time t such as t in (1.4) are referred to as Trend
terms.
Next consider the process
y
t
= + y
t1
+
t
,
t
IID white noise. (1.8)
If = 1 this series is non-stationary and if the initial value of y
t
at t = 0 is y
0
then, by iteration, we have:
y
t
= y
0
+ t +
t

j=1
e
j
. (1.9)
1. NON-STATIONARY TIME SERIES 5
If we remove a linear trend y
0
+ t from this series we are still left with a
non-stationary series

t
j=1
e
j
.
If however we were to dierence the series y
t
then we would nd y
t
= +
t
which is stationary with mean .
Models such as (1.8) which require dierencing to achieve stationarity (and cannot
be made stationary by just removing a linear trend) are called Dierence-Stationary
series, whereas models which are stationary upon removal of a linear trend e.g.
(1.4) are called Trend-Stationary.
Note that the general ARIMA model (from Section I):
(B)
d
(y
t
) = (B)
t
,
could in fact be written as
(L)
d
[y
t
(
o
+
1
t + . . . +
d1
t
d1
)] = (L)
t
(1.10)
because

d
(
o
+
1
t + . . . +
d1
t
d1
) = 0.
Thus (1.10) automatically includes polynomial trends of degree d 1. Including
a polynomial of degree d + k
0
would give
(L)
d
[y
t
(
o
+
1
t + . . . +
d+k
0
t
d+k
0
)]
= (L)
t
(1.11)
1. NON-STATIONARY TIME SERIES 6
which is equivalent to
(L)
d
y
t
= c(t) + (L)
t
, (1.12)
c(t) polynomial of degree k
0
.
Both the Trend-Stationary and Dierence-Stationary models allow for the inclusion
of a polynomial trend but in the Dierence-Stationary case the deviations from
the polynomial trend still require dierencing to achieve stationarity.
Choosing not to dierence a series when in fact dierencing is required can lead
to serious consequences such as spurious regression (c.f. Section ??), which is
one consequence of non-stationarity. As was seen from equation (1.9), removing
a linear trend does not solve the non-stationarity problem if the series is actually
dierence stationary.
Unnecessary dierencing, which has the benet of at least ensuring stationarity,
has far less serious consequences: it can lead to inecient parameter estimates
and over conservative forecast intervals. These parameter estimates are, however,
unbiased and consistent.
In the next section we will examine how to determine whether a series is Dierence
Stationary.