Modeling share price: Aflac Incorporated

Here we revisit our stock price model for Aflac Incorporated (AFL). This model was first estimated in March 2011 and has been several times re-estimated with new data (last November 2012). Currently, we have the closing monthly price for March 2014 and the consumer price indices for February 2014. We decompose a share price into a weighted sum of two consumer price indices. This allows linking any share price with relative pricing power of goods and services associated with the company. Accordingly, our goal is to test the original model and to update time lags and coefficients. Overall, the model has demonstrated an excellent predictive power and stability over the whole period since 2011. It can predict at a one-month horizon and the current prediction foresees no significant changes in the AFL price in 2014.  

As in all previous models, the AFL share price is defined by the consumer price index of household furnishing and operations (HFO) and that transportation services (TS); both presented in Figure 1. In February 2012, the defining time lags were as follows: the HFO index led the share price by 1 month and the TS by 6 months, but in the current model the first lag is one month. All 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

AFL(t) =  -4.43HFO(t-2) – 2.71TS(t-6)  + 19.10(t-2000) + 1094.64, September 2012

AFL(t) =  -4.91HFO(t-1) – 2.59TS(t-6)  + 18.81(t-2000) + 1131.05, March 2014

 

where AFL(t) is the AFL share price in U.S. dollars,  t is calendar time.  

Figure 2 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 ($4.38 for the period between July 2003 and March 2014) is depicted in Figure 3.

Figure 1. Defining indices. 

Figure 2. Observed and predicted AFL share prices. 

Figure 3. The model residual error $4.38.