According to [1], the model for Schlumberger Limited (SLB) is defined by the index of meat and meats, poultry, fish and eggs (MEAT- CUUR0000SAF112) and that of information technology (IT- CUUR0000SEEE). The former CPI component leads the share price by 2 months and the latter one leads by 6 months. Figure 1 depicts the overall evolution of both involved indices. However, both 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 SLB(t) is as follows:
SLB(t) = -3.56MEAT(t-2) – 48.58IT(t-6) - 30.24(t-2000) + 1858.34
The predicted curve in Figure 2 leads the observed price by 2 months with the residual error of $6.30 for the period between July 2003 and June 2010. In other words, the price of a SLB 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 significant 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 SLB share prices. Original prediction is shown by red line. Black diamonds present the original line shifted 2 months ahead.
Figure 3. Residual error of the model. Mean residual error is 0 with standard deviation of $6.30. The largest errors were observed in 2008.
References
Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.
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