Modeling Computer Science Corporation’s share price

Two years ago, we first presented a share price (monthly closing price adjusted for splits and dividends) model for Computer Science Corporation (CSC) as based on the decomposition into a weighted sum of two consumer price indices (NSA borrowed from the BLS database). Approximately a year ago we revisited the original model using all data available through March 2011. The defining indices were obtained three years ago: the index of motor vehicle parts (MVP) and the index of sporting goods (SPO). The CPI components were leading by 0 and 5 months, respectively. Figure 1 depicts the evolution of both indices which provide the best fit model, i.e. the lowermost RMS residual error, between July 2008 and March 2011:

CSC(t) = -3.83MVP(t-0) + 3.16SPO(t-5) +16.31(t-1990) – 137.20, March 2011

where CSC(t) is the share price in US dollars, t is calendar time. In April, we predicted the curve in the upper panel of Figure 2 which is synchronized with the observed one. The residual error was of $3.28 for the period between July 2003 and March 2011. Since the MVP index has been growing since 2002 and the SPO index had a slight negative trend, we predicted that the share price would not be growing in 2011.

In reality, it has fallen slightly from $50 in March to the level of $24 per share in December 2011. Such a dramatic fall is difficult to describe with stochastic price models but our deterministic model has survived the crisis in CSC. There was a period of intensive growth in the MVP index (see Figure 1) which was converted in the share price drop. Currently, the defining indices are the same as three years ago:

CSC(t) = -3.81MVP(t-1) + 3.35SPO(t-7) +15.97(t-1990) – 158.37, January 2012

with slightly increased time delays of 1 month and 7 months, respectively. In the lower panel of Figure 2 the predicted and observed prices are depicted. The error term of the model between July 2003 and January 2012 is displayed in Figure 3 with stdev=$3.51. The residual was negative during the past quarter and we expect the price to grow in 2012Q1 for the model error to return to 0.

Figure 1. Evolution of the price indices MVP and SPO.

Figure 2. Observed and predicted CSC share prices.

Figure 3. Model error, i.e. the difference between the observed and predicted price; stdev = $3.51

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