Three and nine months ago we reported on a share price model for Alcoa (AA), which is company from Materials subcategory of the S&P 500 list specialized in aluminum. Here we test and update the model using new data, including the monthly closing price in December 2011 and the estimated CPI components for December. The principal result is that the model has the same defining CPI components and time lags with slightly shifted coefficients. Therefore, the model is a reliable tool to predict the evolution of Alcoa at a three month horizon.
According to our general approach to share price modeling we decompose the observed time history of the monthly closing AA stock price (adjusted for splits and dividends) into a weighted sum of two CPI components, time trend and free term. Two defining CPI components are selected to minimize the model (RMS) error and may lead or lag behind the share.
The original and current AA model is defined by the (not seasonally adjusted) index of food away from home (SEFV) and the price index of rent of primary residence (RPR), as reported by the US BLS. The former CPI component leads the share price by 3 months and the latter is 5 months ahead of the share price. Figure 1 depicts the overall evolution of both involved indices through August 2011. It seems these indices have been evolving in sync since 2002 with the only step-like change in the SEFV index in 2008. We present three empirical models as estimated in April, October, and December 2011:
AA(t) = -6.71SEFV(t-2) + 3.34RPR(t-4) + 19.23(t-1990) + 298.87, Aril 2011
AA(t) = -6.61SEFV(t-2) + 3.22RPR(t-4) + 19.51(t-1990) + 300.89, October 2011
AA(t) = -6.47SEFV(t-3) + 3.08RPR(t-5) + 19.58(t-1990) + 302.45, December 2011
where AA(t) is a share price in US dollars, t is calendar time. Figure 2 illustrates the observed and predicted models for December 2011. The residual error is $3.05 ($3.04 in October and $3.12 in April) for the period between July 2003 and December 2011. Figure 2 also shows monthly high and low prices as the uncertainty in the monthly closing price as the best share price estimate. Since the closing price has to characterise the whole month by one value the high and low prices might serve as statistical bounds.
One can expect the share price to rise through March 2012.
Figure 1. Evolution of the price of SEVF and RPR.
Figure 2. Observed and predicted AA share prices.