Among many other stocks, in our post on May 30, 2010 we presented a price model for Equity Residential (EQR). It was based on the monthly (adjusted for dividends and splits) closing prices between June 2003 and March 2010. Today we revisited the model and found that it is still valid with almost the same coefficients. The model predicts at a two month horizon with RMSFE=$2.28 (RMSFE – root-mean-square forecasting error).
Our quantitative approach is described in [1]. Briefly, we decompose a share price into a weighted sum of two individual CPI components to minimize the RMS model error.
The set of CPI components consists of 92 independent price indices. When both defining components lead the modeled price, one can predict future evolution of the stock; at least in the near future. The bets-fit two-component (2-C) model for EQR is as follows:
EQR(t) = -3.05SEFV(t-2) + 0.95PDRUG(t-5) + 12.48(t-2000) + 95.29,
where SEFV in the index of food away from home leading the stock price by 2 months, PDRUG is the index of prescribed drugs leading by 5 months, (t-2000) is the elapsed time. The model error is RMSFE=$2.28 for the period between June 2003 and December 2010. This model has been valid during the past fourteen months and we expect it to be valid in the first half of 2011. The stock price might experience some growth in the first quarter of 2011: the index of food away from home has been demonstrating relatively weak growth and other defining parameters have positive influence on the price. The price index of prescribed drugs has a stable positive trend.
Figure 1. Observed and predicted (contemporary – red line, and 2 months shifter – black diamonds) EQR share price, with the model error.
References
1. Kitov, I. (2009), Modelling share prices of banks and bankrupts, Theoretical and Practical Research in Economic Fields, ASERS, vol. I(1(1)_Summer), pp. 59-85
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