Chesapeake Energy stock price model

Another successful example of an energy company with a stable pricing model is Chesapeake Energy Corporation (CHK). Here we present a new price model for CHK using an extended set of 92 CPIs. It is an example with a share price leading defining components of the CPI.  As always, the model is seeking for two CPI components which minimize the difference between observed (monthly closing price adjusted for dividends and splits) and predicted prices for the period between July 2003 and March 2011.

The two-component (2-C) model also includes free term (constant) and linear time term which compensates well known linear (time) trends between various CPI components. The best-fit 2-C model for CHK(t) is based on the index of tuition, other school fees, and child care (TUIT) contemporaneous with the share, and the index of energy (E) lagging by 2 months:

CHKN(t)= 0.52TUIT(t-0) + 0.43E(t+2) – 16.771(t-1990) – 21.48; stdev=$2.64    

where (t-1990)  is the elapsed time. Therefore, the predicted curve should lag the observed price by 2 months. In other words, the price of a CHK share defines the behaviour of the index of energy. Figure 1 depicts the observed and predicted price; the latter is shifted three months ahead for synchronization. The model residual error, i.e. standard deviation, is of $5.54for the period between July 2003 and January 2010.

Figure 1. Observed and predicted CHK share prices.

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