According to , the model for IBM (IBM) is defined by the index of motor vehicle maintenance and repair (MVR - CUUR0000SETD) and that of transportation services (TS - CUUR0000SAS4). The former CPI component leads the share price by 12 months and the latter one leads by 4 months. Figure 1 depicts the overall evolution of both involved indices. These two defining components provide the best fit model between August 2009 and June 2010. Both coefficients and the slope of time trend are negative. ]
So, the best-fit 2-C model for IBM(t) is as follows:
IBM(t) = 4.93MVR(t-12) – 3.51TS(t-4) - 10.39(t-2000) + 39.39
The predicted curve in Figure 2 leads the observed price by 4 months with the residual error of $5.94 for the period between July 2003 and June 2010. In other words, the price of an IBM share is completely defined by the behaviour of the two CPI components.
The model does predict the share price in the past and foresee a fall in the near future. This drop will be in line with the overall fall in the S&P 500 in 2010.
Figure 1. Evolution of the price of MEAT and IT.
Figure 2. Observed and predicted IBM share prices. The original prediction, i.e. the prediction four months before actual time, is shown by red line. Black diamonds present the original line shifted 4 months ahead to fit actual data.
Figure 3. Residual error of the model. Mean residual error is 0 with standard deviation of $5.94. The largest errors were observed in 2008.
Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.