Pepsico in 2011Q2

We have been studying the link between share prices and CPIs since 2008 [1]. The model for Pepsico (PEP) has been stable over the past year and is defined by the consumer price index of food at home (FH), which is a part of the food index, and the index information technology, hardware and software (IT). Both defining CPI components lead the share price by 4 and 8 months, respectively. Figure 1 depicts the overall evolution of the difference between the involved indices. There is a significant change in the trend in 2008 which potentially might cause a change in the sign of defining coefficients.

However, these two defining components provide the best fit model between March 2011 and July 2010.  Both coefficients are negative, and thus the increasing price indices result in a decreasing price of the share. The slope of time trend is positive revealing the price tendency to increase over time. The best-fit 2-C model for PEP(t) is as follows:

PEP(t) =  -1.51FH(t-4)  - 8.19IT(t-8)  + 2.47(t-1990)  + 414.78
    

where t is calendar time.

The predicted and observed curves are presented in Figure 2 and their difference in Figure 3. The residual error is of $2.28 for the period between June 2003 and March 2011. The model provides and an excellent and very stable prediction of the share price in the past and forecasts a significant fall in the price in the second quarter of 2011. It will be a larger challenge to the model. It is worth revisiting the PEP model in July 2011.

Figure 1. Evolution of the difference between FH and IT.

Figure 2. Observed and predicted PEP share prices.

Figure 3. The model residual, i.e. the difference between the observed and predicted PEP share prices.

1. Kitov, I. (2010). Modelling share prices of banks and bankrupts, Theoretical and Practical Research in Economic Fields, ASERS, vol. I(1(1)_Summer) pp. 59-85