According to , the model for Hewlett-Packard (HPQ) is defined by the index of food less beverages (FB) and that of rent of primary residency (RPR). The former CPI component leads the share price by 4 months and the latter one leads by 5 months. Figure 1 depicts the overall evolution of both involved indices. However, these two defining components provide the best fit model between August 2009 and June 2010. One coefficients is negative and one is positive together with time trend, with slope of 3.64.
So, the best-fit 2-C model for HPQ(t) is as follows:
HPG(t) = -3.20FB(t-4) +2.91RPR(t-5) + 3.64(t-2000) - 50.82
The predicted curve in Figure 2 leads the observed price by 4 months with the residual error of $2.13 for the period between July 2003 and June 2010. In other words, the price of a HPQ share is completely defined by the behaviour of the two CPI components.
The model does predict the share price in the past and foresees a fall in 2010. It will be in line with the overall fall in the S&P 500 in 2010.
Figure 1. Evolution of the price of DAIRY and TPU.
Figure 3. Residual error of the model. Mean residual error is 0 with standard deviation of $2.13. The largest errors were observed in 2007.
Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.