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Definition
Financial institutions and corporations as well as individual investors and researchers often use financial time series data (such as asset prices, exchange rates, GDP, inflation and other macroeconomic indicators) in economic forecasts, stock market analysis or studies of the data itself. Data points are often nonstationary OR HAVE MEANS, VARIANCES AND COVARIANCES THAT CHANGE OVER TIME. Nonstationary behaviors can be trends, cycles, random walks or combinations of the three. Non-stationary data, as a rule, are unpredictable and cannot be modeled or forecasted. The results obtained by using non-stationary time series may be bogus in that they may indicate a relationship between two variables where one does not exist. In order to receive consistent, reliable results, the non-stationary data needs to be transformed into stationary data. In contrast to the 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, the stationary process reverts around a constant long-term mean and has a constant variance independent of time.
Mathematical Definition/Formulas
Some series are called I(1) (integrated of order 1). These are non-stationary series whose rst dierence is stationary. A simple I(1) series is the random walk, where yt = yt1 + t , is stationary so, by repeated substitution yt = t + t1 + t2 + Note: series is called integrated because it is sum (integration) of all previous values of shocks Properties of random walks (and integrated series in general)
Conditions
Random Walk with Drift and Deterministic Trend (Yt = + Yt-1 + t + t ) Another example is a non-stationary process that combines a random walk with a drift component () and a deterministic trend (t).It specifies the value at time "t" by the last period's value, a drift, a trend
and a stochastic component. (To learn more about random walks and trends, see our Financial Concepts tutorial.)