Here we routinely revisit the stock price model for Aflac Incorporated (AFL) which we obtained in October 2011 using our concept of share pricing. Accordingly, our goal is to test the original model and to update time lags and coefficients.
Last time we predicted the AFL price using the CPI estimates published by the BLS for September 2011. It was a preliminary model. The share price was defined by the consumer price index of household furnishing and operations (HFO) and that transportation services (TS). In September, the defining time lags are as follows: the HFO index led the share price by 0 months and the TS by 5 months. Adding new data for the period between September and December 2011, we have re-estimated the model and found some changes in the time lags: one and six months, respectively, as well as in the estimated coefficients. The relevant best-fit 2-C models for AFL(t) are as follows:
AFL(t) = -5.02HFO(t-2) – 2.87TS(t-6) + 20.42(t-1990) + 997.71, March 2011
AFL(t) = -4.63HFO(t-0) – 2.90TS(t-5) + 20.41(t-1990) + 953.49, September 2011
AFL(t) = -4.63HFO(t-1) – 2.87TS(t-6) + 20.23(t-1990) + 948.72, December 2011
where AFL(t) is the AFL share price in U.S. dollars, t is calendar time. The changes in time lags are shown in red.
In July 2011, we reported that the original model gave a correct prediction of the fall in Q2 2011. In September 2011, we showed that the contemporary fall in the price had to stop and expected a positive correction in Q4 2011. Figure 1 confirms our prediction and depicts the high and low monthly prices for an AFL share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). The model residual error is depicted in Figure 2. The price will likely not change much in 2012Q1.
Figure 1. Observed and predicted AFL share prices.
Figure 2. The model residual error.