A month ago we routinely revisited the stock price model for Aflac Incorporated (AFL), which we has obtained in October 2011 using our concept of share pricing. We decompose a share price into a weighted sum of two consumer price indices. This allows linking the share price with relative pricing power of goods and services associated with the company. Here we revise the recent model using the new CPI estimates published by the BLS for January 2012. Accordingly, our goal is to test the original model and to update time lags and coefficients.
As in three previous models, the AFL share price is defined by the consumer price index of household furnishing and operations (HFO) and that transportation services (TS). In December 2011, the defining time lags were as follows: the HFO index led the share price by 1 month and the TS by 6 months. Therefore, four relevant best-fit 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
AFL(t) = -4.65HFO(t-1) – 2.86TS(t-6) + 20.20(t-1990) + 949.35, February 2012
where AFL(t) is the AFL share price in U.S. dollars, t is calendar time.
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. A month ago we predicted that the price would likely not change much in 2012Q1. Figure 1 confirms our prediction – the closing price in January was $47.9 and $45.42 in February. It 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 ($4.02 for the period between July 2003 and February 2012) is depicted in Figure 2.
We do not foresee any large change in the price in March and likely in April 2012.
Figure 1. Observed and predicted AFL share prices.
Figure 2. The model residual error $4.02.