In May 2010 we presented a price model for Amgen Inc. (AMGN). It was based on the monthly (adjusted for dividends and splits) closing prices between June 2003 and March 2010. Today we revisited the model and found that it is still valid with almost the same coefficient. (Our concept and quantitative approach are described in the paper “Modelling share prices of banks and bankrupts” published in Theoretical and Practical Research in Economic Fields, ASERS, vol. I(1(1)_Summer), pp. 59-85).
Briefly, we decompose a share price into a weighted sum of two individual CPI components to minimize the RMS model error. The set of CPI components consists of 92 independent price indices of different level: from major (overall and core CPI) to very small (e.g. photo and related materials). When both defining components lead the modeled price, one can predict future evolution of the stock; at least in the near future. The bets-fit two-component (2-C) model for AMGN is as follows:
AMGN(t)= 0.83*DAIRY(t-13) – 4.62*AB(t) +18.89(t-2000) + 530.4
where DAIRY in the index of dairy and related products leading the stock price by 13 months, AB is the index of alcoholic beverages leading by 0 months, (t-2000) is the elapsed time. Figure 1 compares the observed and predcited time series. There is not time delay between these series. The best fit model provides RMSE=$4.28 for the period between June 2003 and December 2010. This model has been valid during the past two years and we expect it to be valid in the first half of 2011. The stock price should not change much if both defining CPIs do not change.
Figure 1. Observed and predicted share prices, AMGN.