One way of making a series stationary is?

Expert Solution

The two ways to make a non-stationary time series stationary are:

Differencing

Transforming

Let us look at some details for each of them:

Differencing:

In order to make your series stationary, you take a difference between the data points. So let us say, your original time series was:

X1, X2, X3,...........Xn

Your series with the difference of degree 1 become:

(X2 - X1, X3 - X2, X4 - X3,.......Xn - X(n-1)

Once, you take the difference, plot the series and see if there is any improvement in the ACF curve. If not, you can try a second or even a third order differencing. Remember, the more you difference, the more complicated your analysis is becoming.

Transformation

If you cannot make a time series stationary, you can try out transforming the variables. Log transform is probably the most commonly used transformation if you are seeing a diverging time series.
However, it is normally suggested that you use transformation only in case differencing is not working.

milcah answered 1 month ago

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