We continue modelling share prices for companies from S&P 500 list. A new financial corporation Western Alliance Bancorporation (WAL). It has a very short time history of listing in the S&P 500 - since 2005. But it provides an outstanding example of prediction. In previous posts, we developed a pricing model and predicted share prices from the differences in CPI for XOM, COP, DVN, CVX, HAL, APD, PG, DD, IBM, MSFT, and DOV . In turn, WAL share price allows predicting the difference at a several months horizon.
Figure 1 displays observed and predicted monthly close share prices adjusted for dividends and splits (retrieved from finance.yahoo.com). The predicted price is obtained from the difference between core CPI, cCPI, and headline CPI, CPI, in the USA using the following relationship:
WAL(t) = 6.0(cCPI(t)-CPI(t)) +8
where WAL (t) is the price of one share of WAL. The predicted curve in Figure 1 is smoothed by 12-month moving average, MA(12). There is no time lag between the observed and predicted curves. The scaled and smoothed CPI difference practically repeats the behavior of the WAL share price since the very beginning. (In this post, we do not carry out any statistical estimate, but the interested reader will apparentrly obtain a high Rsq.)
where WAL (t) is the price of one share of WAL. The predicted curve in Figure 1 is smoothed by 12-month moving average, MA(12). There is no time lag between the observed and predicted curves. The scaled and smoothed CPI difference practically repeats the behavior of the WAL share price since the very beginning. (In this post, we do not carry out any statistical estimate, but the interested reader will apparentrly obtain a high Rsq.)
In the near future one can expect that the difference will go down to match the observed decline in the WAL curve. This means that the headline CPI will be growing faster than the core CPI at least during the next six months.
Therefore, the behavior of WAL share price is a reliable indicator of the future evolution of the difference between the core and headline CPI, the latter including food and energy. Thus, the price indices for energy and food will grow faster than that for the core CPI.
All in all, we have a good evidence that oil price will grow in the next six months. Then, it will start to decline as the most recent turn in WAL share price indicates. It is exciting and helpful to follow up WAL share price, isn't it?
Figure 1. Observed share price of WAL and that predicted from the difference between the core CPI and headline CPI.
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