deflate the serie before arma

[efes]

Hi all,
i want to ask ; when building an arma model with oil prices , do i have to deflate the serie ?
Or can i use the current state of the serie? Which one is true. Thanks a lot...

[tcfoon]

Dear Efes,

From my point of view you no need to deflate the series (i.e. oil prices) when perform the ARMA as your variable of interest is oil prices but not sales of oil (in dollar). The purpose to deflate is to remove the inflation effect from the series. In fact, you have to check the stationarity properties of the series, if the variable under consideration is stationary at level, then you can proceed to ARMA, otherwise ARIMA will be more appropriate. For your case, I think I ARIMA will be more appropriate as the oil prices is a non-stationary series.

Hope the above explanation clear you doubt.

Thank you,

Regards,
CF Tang

[efes]

Dear tcfoon,
First thanks for replying. As i understand from your reply is it suitable modelling with current prices. I was a little confused about theoretically is it must to deflate before modelling with prices. I think now its ok ! Thanks again..
B.R.