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Determining the Order of Differencing in Autoregressive Processes

David Dickey and Sastry G Pantula

Journal of Business & Economic Statistics, 2002, vol. 20, issue 1, 18-24

Abstract: One way of handling nonstationarity in time series is to compute first differences and fit a model to the differenced series unless the differenced series also looks nonstationary. In that case, second- or higher-order differencing is done. To decide if the current degree of differencing is sufficient, one can look at the autocorrelation function for slow decay. A formal statistical test for the need to difference further is available if one is willing to assume that at most one more difference will render the series stationary. In this article, we present a proper sequence of statistical tests that allows the practitioner to handle cases in which a high order of differencing may be needed. The proper sequence is not the traditional sequence, which begins with a test for a single unit root.

Date: 2002
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Handle: RePEc:bes:jnlbes:v:20:y:2002:i:1:p:18-24