 Data concepts

Stationarity and differencing

Statistical stationarity: A stationary time series is one whose statistical properties such as mean, variance, autocorrelation, etc. are all constant over time. Most statistical forecasting methods are based on the assumption that the time series can be rendered approximately stationary (i.e., "stationarized") through the use of mathematical transformations. A stationarized series is relatively easy to predict: you simply predict that its statistical properties will be the same in the future as they have been in the past!   (Recall our famous forecasting quotes.)  The predictions for the stationarized series can then be "untransformed," by reversing whatever mathematical transformations were previously used, to obtain predictions for the original series. (The details are normally taken care of by your software.) Thus, finding the sequence of transformations needed to stationarize a time series often provides important clues in the search for an appropriate forecasting model.  Stationarizing a time series through differencing (where needed) is an important part of the process of fitting an ARIMA model, as discussed in the ARIMA pages of these notes.

Another reason for trying to stationarize a time series is to be able to obtain meaningful sample statistics such as means, variances, and correlations with other variables. Such statistics are useful as descriptors of future behavior only if the series is stationary. For example, if the series is consistently increasing over time, the sample mean and variance will grow with the size of the sample, and they will always underestimate the mean and variance in future periods. And if the mean and variance of a series are not well-defined, then neither are its correlations with other variables. For this reason you should be cautious about trying to extrapolate regression models fitted to nonstationary data.

Most business and economic time series are far from stationary when expressed in their original units of measurement, and even after deflation or seasonal adjustment they will typically still exhibit trends, cycles, random-walking, and other non-stationary behavior.   If the series has a stable long-run trend and tends to revert to the trend line following a disturbance, it may be possible to stationarize it by de-trending (e.g., by fitting a trend line and subtracting it out prior to fitting a model, or else by including the time index as an independent variable in a regression or ARIMA model), perhaps in conjunction with logging or deflating.   Such a series is said to be trend-stationary.    However, sometimes even de-trending is not sufficient to make the series stationary, in which case it may be necessary to transform it into a series of period-to-period and/or season-to-season differences.  If the mean, variance, and autocorrelations of the original series are not constant in time, even after detrending, perhaps the statistics of the changes in the series between periods or between seasons will be constant.   Such a series is said to be difference-stationary(Sometimes it can be hard to tell the difference between a series that is trend-stationary and one that is difference-stationary, and a so-called unit root test may be used to get a more definitive answer.  We will return to this topic later in the course.)  