PepsiCo share price

According to [1], the model for PepsiCo (PEP) is defined by the index of food at home (FH) and that of information technology (IT). The former CPI component leads the share price by 4 months and the latter one leads by 8 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 are negative and the slope of time trend is positive.

So, the best-fit 2-C model for PEP(t) is as follows:

PEP(t) = -1.41FH(t-12) – 8.54IT(t-4) +1.54(t-2000) + 416.80

where t is calendar time.

The predicted curve in Figure 2 leads the observed price by 4 months with the residual error of $2.26 for the period between July 2003 and June 2010. In other words, the price of a PEP share is completely defined by the behaviour of the two CPI components.

The model does predict the share price in the past and foresee no change in the near future. This is one of rare shares that is not predicted to drop with the overall fall in the S&P 500 in 2010.

 

Figure 1. Evolution of the price of FH and IT.

Figure 2. Observed and predicted PEP 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 $2.26. The largest errors were observed in 2008.

References

Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.