11/9/2019 What is unit root in a time series?

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What is unit root in a time series? Why do we do unit root tests?

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What is a time series?

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Answered Jan 20, 2017

A unit root refers to a stochastic trend in time series. Let me explain this with an
easy example.

A time series is a process that can be written in its components which contains
‘roots’. For example:

vt = c + a1 vt−1 + ϵt−1

The coefficient a1 is a root .You can interpret this process/formula as ‘the value of
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today depends on the value of yesterday and some randomness we can’t predict’.
We expect this process to always converge back to the value of c . Try this is out with Profesionales de excelencia que lo
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an example: suppose c = 0 and a1 = 0.5 . If yesterday ( vt−1 ) the value was 100 , Consulte nuestros planes.
then we expect that today the value will be around 50 . Tomorrow, we expect the
value to be 25 and so on. You see that this series will ‘come home’, in this case
meaning it will converge back to the value of c .

When one of the roots is a unit, i.e. equal to 1 (in this example when a1 = 1) , then
this series will not recover to its origin. You can see this by using the example given
above. That is why the concepts of unit roots and unit root tests are useful: it give us
insights in whether the time series will recover to its expected value. If this is not the
case, then the process will be very susceptible to shocks and hard to predict and
control.

Note that there are more rigorous mathematical explanations on the web about unit
roots like this one.
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