Differencing is where your data has one less data point than the original data set. For example, given a series Zt you can create a new series Yi = Zi – Zi – 1. As well as its general use in transformations, differencing is widely used in time series analysis.

“A series with no deterministic component which has a stationary, invertible ARMA representation after differencing d times is said to be integrated of order d…(Engle and Granger 1987, p. 252.)”

**References:**

Engle, R. F. and Granger, C. W. J. (1991) Long-run Economic Relationships: Readings in Cointegration, Oxford University Press.

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