Time Series Analysis Stationarity and Differencing 2

Question 1

What does the Augmented Dickey-Fuller test add compared to the simple Dickey-Fuller test?

Accepted Answer

Lagged difference terms to account for serial correlation in residuals

Answer

The ADF augments the basic test with lagged first differences to ensure residuals are white noise, correcting for serial correlation.

Question 2

A time series with a deterministic trend is best handled by:

Accepted Answer

Detrending (subtracting a fitted trend)

Answer

A deterministic trend can be removed by fitting and subtracting a regression trend line, leaving a stationary residual.

Question 3

What is the Phillips-Perron (PP) test used for?

Accepted Answer

Testing for unit roots with non-parametric correction for serial correlation

Answer

The PP test is a unit root test that uses a non-parametric correction for serial correlation, making it robust to heteroscedasticity.

Question 4

If a time series requires differencing twice (d=2) to become stationary, it is said to be:

Accepted Answer

Integrated of order 2, I(2)

Answer

A series requiring two differences is I(2), meaning it has two unit roots and is second-order integrated.

Question 5

Which visual tool is most helpful for an initial stationarity assessment?

Accepted Answer

Time series plot showing mean and variance over rolling windows

Answer

Plotting rolling mean and variance reveals whether the series has shifting central tendency or spread, indicating non-stationarity.

Time Series Analysis Practice Test