In April 2011, we introduced a new model for Pepco Holdings (POM) and predicted its share to rise. The defining CPI indices were as follows: the index of food away from home (SEFV) and the index of owners' equivalent rent of residence (ORPR). The CPI components are leading by 4 and 5 months, respectively. The best fit model, i.e. the lowermost RMS residual error, between July 2010 and March 2011:
igure 1. Observed and predicted POM share prices. F
POM(t) = -2.66SEVF(t-4) +1.06ORPR(t-5) +11.83(t-1990) + 101.35
where POM(t) is the share price in U.S. dollars, t is calendar time.
We predicted that “In the second quarter of 2011, the model foresees a rise by $1.5.” Actual monthly closing price has increased from $18.55 in March to $19.63 in June 2011. The predicted price is well within the high/low monthly bounds, i.e. practically within the uncertainty bounds of the POM price.
Overall, our prediction from April 2011 was correct and we are going to revise the POM model for Q3 2011 when all relevant CPI readings are available.