## Saturday, July 6, 2019

### Seasonal Unit Roots - Background Information

A recent email query about the language that we use in the context of non-stationary seasonal data, and how we should respond to the presence of "seasonal unit roots", suggested to me that a short background post about some of this might be in order.

To get the most from what follows, I suggest that you take a quick look at this earlier post of mine - especially to make sure that you understand the distinction between "deterministic" seasonality" and "stochastic seasonality" in time-series data.

There's an extensive econometrics literature on stochastic seasonality and testing for seasonal unit roots, and this dates back at least to 1990. This is hardly a new topic, but it's one that's often overlooked in the empirical applications.

Although several tests for seasonal unit roots are available, the most commonly used one is that proposed by Hylleberg et al. (1990) - hereafter "HEGY". Depending on what statistical/econometrics package you prefer to use, you'll have at least some access to the HEGY test(s), and perhaps some others. For instance there are routines that you can use with R, stata, and Gretl.

The EViews package includes a rather complete built-in suite of different seasonal unit root tests for time series data with various periodicities - 2, 4, 5, 6, 7, and 12. This enables us to deal with trading-day weekly data, and calendar weekly data, as well as the usual "seasonal" frequencies.

I'm not going to be going over the tests themselves here.

Rather, the objectives of this post are, first, to provide a bit of background information about the language that's used when we're talking about seasonal unit roots. For instance, why do we refer to roots at the zero, π, frequencies, etc.? Second, in what way(s) do we need to filter a time series in order to remove the unit roots at the various frequencies?

Let's begin by considering a quarterly time series, Xt (t = 1, 2, ........). We'll use the symbol "L" to denote the lag operator. So. L(Xt) = Xt-1; L2(Xt) = L(L(Xt)) = L(Xt-1) = Xt-2etc. In general, Lk(Xt) = Xt-k.