3/28/10

Modeling share prices of financial companies: BAC

The model for Bank of America (BAC) is defined by the index of food without beverages (FB) and that of food away from home (SEFV). The latter CPI component leads by 13 months. From our past experience, the larger is the lag the more unreliable is the model. However, both defining components provide the best fit model in the second half of 2009. Both coefficients in the BAC model are negative. This means that increasing food price forces the share price down. The growth in the indices of food and food away from home has been compensated by linear time trend in the share price

So, the best-fit 2-C model for BAC(t) is as follows:

BAC(t)= -2.88FB(t-3) – 3.09SEFV(t-13) + 35.69(t-2000) + 964.6

The predicted curve should lead the observed price by 3 months with the residual error of $2.52 for the period between July 2003 and February 2010. In other words, the price of an BAC share is completely defined by the behaviour of the two CPI components. Figure 1 depicts the observed and predicted prices, the latter shifted three months back for synchronization.

The model does predict the share price. Therefore, it should be revisited at a monthly basis. In March, April and May 2010, the price is expected at $18.5, $17.1 and $18.3, respectively. On 26th of March, the price was at $17.90.

Figure 1. Observed and predicted BAC share prices.

References
Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.

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