On the successful prediction of the HPQ share price in Q2 2011

Three months ago, we presented a model for HPQ stock price based on the decomposition into a weighted sum of two CPI components. We predicted the evolution of the monthly closing price (adjusted for dividends and splits) four months ahead using the CPI estimates published by the BLS on April 14.

The long term model is defined by the index of food without beverages (FB) and that of rent of primary residency (RPR). The former CPI component leads the share price by 4 months and the latter one leads by 5 months. Figure 1 depicts the overall evolution of both involved indices through March 2011. The best-fit 2-C model for HPQ(t) was as follows:

HPQ(t) = -3.34F(t-4) + 3.41RPR(t-5) + 0.51(t-1990) – 85.44

The predicted curve is shown in Figure 2 and covers the period between July 2003 and March 2011. In the second quarter of 2011, the model predicted the share price to fall to the level of $37 in June 2011 and then to $33 by the end of July 2011. Figure 3 demonstrates that this prediction was almost correct and the closing price of June 2011 is $36.4.

The U.S. Bureau of Labor Statistics will publish the estimates for the involved CPI components for June 2011 only in the middle of July. We are going to revise the current HPQ model and publish our prediction for the third quarter of 2011. Meanwhile, we expect a HPQ share to fall in July 2011 to the level of $33.

Figure 1. Evolution of the price of FB and RPR.

Figure 2. Observed and predicted HPQ share prices in March 2011. 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. The evolution of a HPQ share price as predicted in March 2011 and the actually observed monthly closing price (adjusted for dividends and splits) between April and June 2011.

The monthly closing price is one of many measures of stock prices. One can average daily or hourly prices over one month and model them instead of the monthly closing price. Therefore, the predicted prices should be considered in the framework of the uncertainty in actual prices. Figure 4 depicts the predicted and observed monthly closing prices for HPQ together with (adjusted) monthly low and high prices. The predicted price is well inside the uncertainty of the observed one but four months ahead of it.

Figure 4. Monthly observed and predicted closing prices together with monthly low and high prices.

No comments:

Post a Comment