In this post, we describe the pricing model for Exxon Mobil’s (XOM) share as based on our concept of stock dependence on consumer price index. Unlike in the simplified model for ConocoPhillips’ share, which included only the core and headline CPI, here we use a set of 92 individual consumer price indices to select the best two.
Exxon Mobil provides an example of a company with share price leading defining components of the CPI. Our model is seeking two CPI components from a large number of pre-selected ones, which minimize the difference between observed (monthly closing price adjusted for dividends and splits) and predicted prices for the period between July 2003 and January 2012. A two-component (2-C) model also includes free term (constant) and linear time term, which compensates well know linear (time) trends between various CPI components. The best-fit 2-C model for XOM(t) is as follows:
XOM(t)= -1.70OFH(t-3) – 2.98RRM(t-10) + 22.73(t-2000) + 581.17
where OFH in the index other food at home lagging the stock price by 3 months, RRM is the index of recreation reading materials leading by 10 months, (t-2000) is the elapsed time. Figure 1 depicts the evolution of both CPIs.
Figure 2 depicts the observed and predicted prices, the latter shifted three months ahead for synchronization, i.e. the predicted curve leads the observed price by 3 months. The model residual error shown in Figure 3 has standard deviation of $4.41 for the period between July 2003 and January 2012.
The estimated model shows that Exxon Mobil’s share will be growing in 2012Q1.
Figure 1. The evolution of CPIs.
Figure 2. Observed and predicted XOM share prices.
Figure 3. The model error.