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Ivan Kitov
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I am a Doctor of Physics and Mathematics, Lead Researcher at the Institute for the Geospheres' Dynamics, Russian Academy of Sciences. Founding member of the Society for the Study of Economic Inequality Published three monographs in economics and finances: Deterministic mechanics of pricing... More
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Stock Market Science
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Economics as Classical Mechanics
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Deterministic mechanics of pricing
  • Modeling share prices of financial companies: LM  0 comments
    Mar 27, 2010 7:03 AM | about stocks: LM

    The model for Legg Mason (NYSE:LM) is based on the index of food and beverages (NYSE:F) and the index of appliances (NYSE:APL) from the housing index, leading by 4 and 13 months, respectively Overall, the predicted time series is very close to the observed one with standard deviation of $7.03 between July 2003 and February 2010. The largest input to the standard deviation comes from a short period in 2006. Otherwise, both curves are very close even during the dramatic fall from $80 per share in the end of 2007 to $10 per share in February 2009 and during the fast recovery in 2009.

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

    LM(t)= -5.77F(t-4) – 8.44APL(t-13) + 31.25(t-2000) + 1743.5

    The predicted curve should lead the observed price by 4 months. In other words, the price of a LM share is completely defined by the behaviour of the two CPI components. Figure 1 depicts the observed and predicted prices, the latter shifted four months back for synchronization.

    The model does predict the share price. Therefore, it should be revisited at a monthly basis. In March and April 2010, the price is expected at $30 and $33, respectively. On 26th of March, the price was at $29.5. However, the predicted curve shows a sudden fall to the level of $22 in May/June 2010.

    Figure 1. Observed and predicted LM share prices.

    Disclosure: No positions

    Stocks: LM
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