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Stationarity VS Non-stationarity

Perform Augmented Dickey-Fuller Test

Testing for Non-stationarity

Differencing

  • By taking the differences between two values in the series

  • Key concept: Lag (how far apart these 2 values are)

Dickey Fuller Test

Steps:

1) Make a hypothesis testing

2) Test statistic

3) Compare t statistic and critical value

4) Decision rule :

If |t| < critical value, conclude H0

If |t| > critical value, conclude H1

5) Make a conclusion - Reject/Not reject null hypothesis

Types of Differencing

Examples

Definition

Formula

Example

  • Non-stationary process that has a variable variance and a mean that does not remain near, or returns to a long-run mean over time.

  • There are trends exist in the distribution of the series.

Stationarity

Non-stationarity

Formula

Definition

  • The properties such as mean, variance and autocorrelation structure do not depend on the time at which the series is observed.

  • The distribution of the series have constant properties over the time.

Group 4:

Chai Wei Wei (AW160195)

Cham Soo Jun (AW160238)

Lee Sin Min (AW160246)

Siti Nor Kalizah Bt Ismail (AW160062)

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