Unit Root - Properties and Characteristics of Unit-root Processes

Properties and Characteristics of Unit-root Processes

  • Shocks to a unit root process have permanent effects which do not decay as they would if the process were stationary
  • As noted above, a unit root process has a variance that depends on t, and diverges to infinity
  • If it is known that a series has a unit root, the series can be differenced to render it stationary. For example, if a series is I(1), the series is I(0) (stationary). It is hence called a difference stationary series.

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