Comparison of SunTrust Banks (STI) and Franklin Resources (BEN) models
May 01, 2011 2:46 AM ET
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Medium-Term Horizon, Macro, Oil & Gas
Seeking Alpha Analyst Since 2009
I am a Doctor of Physics and Mathematics, Lead Researcher at the Institute for the Geospheres' Dynamics, Russian Academy of Sciences. In economics and finances, we apply strict quantitative methods, like those in classical mechanics, to predict the evolution of measured economic and financial variables: real GDP, inflation, unemployment, labor productivity, labor participation rate, personal income distribution, firm size distribution, S&P 500 returns, prices of commodities and shares of S&P 500 companies. We give only varified quantitative predictions - less words, more figures. Download original articles and working papers from Research Papers in Economics: http://ideas.repec.org/e/pki113.html
The price model for SunTrust Banks (STI) is a brand new one. Like Franklin Resources (BEN) reported four days ago, it is a financial company and was analyzed previously as a candidate for a bankruptcy . The newly obtained model is based on is our stock pricing concept and includes the consumer price index of food less beverages (FB) (it was food at home, FH, for BEN) and the index of tobacco and tobacco products (TOB). The former defining CPI component led the share price by 4 months and the latter one by 6 months (5 and 8 months, respectively for BEN). Therefore, the model has a natural 4-month forecast horizon. It is worth noting that there are two financial companied driven by the same CPIs.
Figure 1 depicts the overall evolution of the involved indices. These two defining CPI components provide the best fit model between March 2011 and July 2010. Both coefficients are negative, as in many models already reported in this blog, and thus the increasing prices result in decreasing share price. (However, the sensitivity to the TOB index is much lower than to the FB index, as was also valid for BEN). The slope of time trend is positive and would provide a $36 increment per year if both CPIs are fixed. The best-fit 2-C model for STI(t) is as follows:
STI(t) = -5.46FB(t-4) – 0.19TOB(t-6) + 36.07(t-1990) + 627.06
where STI(t) is a share price in US dollars, t is calendar time. The standard deviation of $3.77 between July 2003 and March 2011. There was no growth during the first quarter of 2011 since no one of the defining indices has demonstarted any big movement. In the second quarter of 2011, the price may drop to the level of $23 (and then to $18) from the current $28, as follows from the predicted and observed curves presented in Figure 2. Figure 3 displays the model error.
Figure 1. The evolution of the difference between FB and TOB.
Figure 2. Observed and predicted STI share prices. The predicted curve leads by 4 months and was shifted ahead for synchronization with the observed one. Notice excellent prediction of major turns in the price.
Figure 3. The model residual, i.e. the difference between the observed and predicted STI
1. Kitov, I. (2010). 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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