Two years ago we presented several models linking share prices of companies to the difference between the headline and core CPI (Kitov and Kitov 2009c) including Halliburton (NYSE:HAL), Devon Energy (NYSE:DVN), and Chevron (NYSE:CVX). Before that paper, we had modeled and predicted the evolution of share prices of ConocoPhillips (NYSE:COP) and Exxon Mobil (NYSE:XOM) (Kitov 2009).
It was demonstrated that the time history of these prices could be accurately approximated by a linear function of the difference between core CPI (cCPI) and headline CPI (CPI) in the United States. This difference is found to be the best to predict share prices in the energy subcategory of the S&P 500. The underlying model was an intrinsically deterministic and described the evolution of share prices along predetermined trajectories.
Here we revisit all five models using new estimates of the core and headline CPI and the previously obtained coefficients. In that sense, we validate the models with new data. Our pricing model is simple. It states that a share price, for example that of ConocoPhillips, COP(t), can be approximated by a linear function of the difference between the core and headline CPI:
COP(t) = A + BdCPI(t + t1) (1)
where dCPI(t) = (cCPI(t) – CPI(t)), A and B are empirical constants (for COP, A=72 and B=-5.5 for the period between 1999 and 2009); t is the elapsed time; and t1=1/6 year is the time delay between the share and the dCPI changes, i.e. the dCPI has a lag behind the share price. For other four energy-related companies, the models were as follows:
XOM= -6.0dCPI(t+1/12) +90; 1999-2009
CVX = -5.0dCPI(t+0) + 85; 1999-2009
DVN = -7.5dCPI(t+1/6) + 93; 1999-2009
HAL = -3.5dCPI(t-1/6) + 43; 1999-2009
Figure 1 displays all five models with coefficients obtained in 2009. All in all, the prediction was excellent and these prices are likely defined by the difference between the core CPI and the headline CPI. Considering increasing oil price, the rise in the share prices is not surprising. When oil price is down, the share will fall.
Figure 1. The observed and predicted share prices.
Kitov, I. (2009). Predicting ConocoPhillips and Exxon Mobil stock price, Journal of Applied Research in Finance, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. I(2(2)_ Wint), pp. 129-134.
Kitov, I., Kitov, O. (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.
Kitov, I., Kitov, O. (2009a). A, MPRA Paper 15039, University Library of Munich, Germany, fair price for motor fuel in the United States
Kitov, I., Kitov, O. (2009b). Sustainable trends in producer price indices, Journal of Applied Research in Finance, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. I(1(1)_ Summ), pp. 43-51.
Kitov, I., Kitov, O. (2009c). Predicting share price of energy companies: June-September 2009, MPRA Paper 15863, University Library of Munich, Germany
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.