Alcoa (AA) is a company from Materials subcategory of the S&P 500 list specialized in aluminum. According to our general approach to share price modeling we decompose the observed time history of the monthly closing AA stock price (adjusted for splits and dividends) into a weighted sum of two CPI components, time trend and free term. Two defining CPI components are selected to minimize the model (RMS) error and may lead or lag behind the share.
The AA model is defined by the (not seasonally adjusted) index of food away from home (SEFV) and the price index of rent of primary residence (RPR), as reported by the US BLS. The former CPI component leads the share price by 2 months and the latter is 4 months ahead of the share price. Figure 1 depicts the overall evolution of both involved indices through March 2011. It seems these indices have been evolving in sync since 2002 with the only step-like change in the SEFV in 2008. The final empirical pricing model for AA is as follows:
AA(t) = -6.71SEFV(t-2) + 3.34RPR(t-4) + 19.23(t-1990) + 298.87
where AA(t) is a share price in US dollars, t is calendar time. Figure 2 illustrates the observed and predicted models. The residual error is $3.12 for the period between July 2003 and March 2011. One can expect the share price to hover at the level of $15 in the near future.
Figure 1. Evolution of the price of SEVF and RPR.
Figure 2. Observed and predicted AA share prices.
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