The model for Yahoo! (YHOO) is a weird example of the deterministic character of share price evolution. Our model for YHOO is stable over the past year but is defined by somewhat unexpected indices: the consumer price index of meat, poultry, fish and eggs (MEAT) and the index of motor vehicle parts and equipment (MVP). Both defining indices seem to have no relation to the internet services. On the other hand these CPIs are the most basic ones and are in the root of any economic activity.
The MEAT index leads the share price by 6 months and the MVP one - by 1 month. Figure 1 depicts the overall evolution of both involved indices. These two defining components provide the best fit model between June 2010 and December 2010. The MEAT coefficient is positive and thus the increasing price of meats, poultry, fish and eggs causes the share price to grow. The MVP index has a negative coefficient and causes the share to fall. The slope of time trend is positive revealing the price tendency to increase over time. The best-fit 2-C model for YHOO(t) is as follows:
YHOO(t) = 0.49*MEAT(t-6) – 3.27*MVP(t-1) + 10.47(t-2000) + 145.67
where t is calendar time.
The predicted and observed curves are presented in Figure 2. The residual error is of $2.51 for the period between June 2003 and December 2010. The model provides a relatively good prediction of the share price in the past. Currently, the predicted price shows no tendency to rise. All in al, one should not expect the YHOO price to grow fast.
Figure 1. Evolution of the price of MEAT and MVP.
Figure 2. Observed and predicted YHOO share prices.