In the beginning of 2011, we revisited the share price model for HPQ and predicted no change for the period between the end of November ($42.1) and the closing price of the first quarter of 2011. Actually, the closing price was $40.26. There was a sharp peak in December 2010 ($45.69), however.
This time we use the CPI estimates published by the BLS on March 14. The newly obtained model is the practically same as before. It is defined by the index of food without beverages (FB) and that of rent of primary residency (RPR). Again, the former CPI component leads the share price by 4 months and the latter one leads by 5 months (i.e. one can predict at a four-month horizon). Figure 1 depicts the overall evolution of both involved indices. Considering the previous findings, these two defining components provide the best fit model between November 2009 and March 2010. One coefficient is negative and one is positive and the best-fit 2-C model for HPQ(t) is as follows:
HPQ(t) = -3.34F(t-4) + 3.41RPR(t-5) + 0.51(t-1990) – 85.44
This model is just slightly different from that estimated in January. The index of food has replaced that of food less beverages (FB). The difference between these indices is practically negligible, however. Both coefficients are practically the same as before. The predicted curve in Figure 2 leads the observed price by 4 months with the residual error of $2.29 for the period between July 2003 and March 2011.
The residual of the model in Figure 3 has demonstrated a quick recovery into the positive zone since the previous post.
For the second quarter of 2011, the model predicts the share price to fall to the level of $37 in June 2011 and even to $33 by the end of July 2011. Such a decrease will be a good validation for the model.
Figure 1. Evolution of the price of FB and RPR.
Figure 2. Observed and predicted HPQ share prices. The contemporaneous prediction is shown by red line. Black diamonds present the original line shifted 4 months ahead, i.e. the model. We expect the price to fall down to $33 in July 2011.
Figure 3. Residual error of the model.