Hands-On Machine Learning for Algorithmic Trading

How to diagnose and address unit roots

Unit roots pose a particular problem for determining the transformation that will render a time series stationary. Time series are often modeled as stochastic processes of the following autoregressive form that we will explore in more detail as a building block for ARIMA models:

Where the current value is a weighted sum of past values plus a random disturbance. Such a process has a characteristic equation of the following form:

If one of the roots of this equation equals 1, then the process is said to ...