Twenty months ago we presented a preliminary share price model for Bank of America (NYSE: BAC). It was based on the decomposition of the price into a weighted sum of two consumer price components, a linear time trend and a constant (see details here). All coefficients, time lags and CPIs were estimated by the least squares as applied to the model error. Here we revisit the model using new data through September 2011. The newly estimated model differs from the preliminary one due to strict constraints on time lags and new data.
The preliminary model was a defined by the index of food without beverages (FB) and that of food away from home (SEFV). The latter CPI component leads by 13 months. From our past experience, the larger is the lag the more unreliable is the model. So it happened to the preliminary model and the best-fit two component model for BAC(t) is as follows:
BAC(t)= -2.35OHF(t) + 1.19H(t) + 1.97(t-1990) + 165.79
where OHF is the consumer price index of other food at home and H(t) is the index of housing, both having notime lag behind the price (see Figure 1 for the evolution of the CPIs). Both CPIs are available only for August 2011, and thus we actually have a one month lead of the CPIs, if they would have been already available for September 2011. One has to reestimate the model when the CPIs for September are published by the BLS . The standard deviation of the modeling error is $2.80 for the period between July 2003 and September 2011.
Figure 2 depicts the observed and predicted prices and indicates that the market overestimates the share above the predicted level. The overestimation is also clear from Figure 3 where the model residual is displayed. All in all, Bank of America might have serious problems, which could bring its share price down to $1 in the near future. Similar problems had Lehman Brothers and other banks several months before bankruptcy. BofA aslo was a bankrupt, but was bailed out.
Figure 1. The evolution of the defining consumer price indices.
Figure 2. Observed and predicted BAC share prices.
Figure 3. The model error
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