2010 International Conference on Intelligent Computing and Cognitive Informatics

A new model between Stock valuation index and Volotility of stock price
Chengying He1,2
The institute of China Security market, Zhejiang University of Finance & economics, Hangzhou,310018,China e-mail: szhcy@tom.com
AbstractEvaluation index are long been thought as very accurately reflect stock price by people in China. In this paper, we build theory models to study the raltionship between volume,P/B(Price-to-Book value Ratio),P/S(Priceto-Sale Ratio) and P/CF(Price-to-Cash Flow Ratio) and stock market volatility. In current China stock market, individual stock price volatility is a complicated function. The resulting stock price function has four variables as input: volume,PB,PS,PC. In this paper,we present a new mathematical model to simulate stock price volatility. We applied the new model to a stock through empirical analysis. Our conclusions are as follows: (1) The volatility of stock price is a function of parameters of PB,PS and PC.(2) Our new model can predict future stock price changes.(3) PB,PS and PC has positive effect on stock price. Moreover, this paper proposed some potential methods and system suggestions for the further improvement of stock price pridiction in China stock market.Overal, the empirical analysis results show that the new model can enhance the volatility forecasting ability of individual stock in china stock market. Keywords- Volatility; stock valuation, stock price

Qinghzen Xu2 & Ying Liu2

11F-05, International Trust Building, Guosen Securities Co. Ltd Shenzhen, 518001,China liuying002@gmail.com genetic algorithms(GAS) approach to feature discretization and the determination of connection weights for artificial neural networks to predict the stock price index[7-14]. Their study has certain limitations. The number of of processing elements in the hidden layer will affect the performance fo the model.Their optimization objects are only two. Its not enough. Chih-Hsiung Tseng etc. presents an integrated model to improve the variance forecasting ability[12-13]. However, the error term sequence always display noise and are not stable.In this paper, we analyze the shortage of traditional valuation model and develop a stock price volatility function with four parameters. We study every parameters effect on stock price. The paper proceeds as follows. Section 2 outlines our valuation index and parameter design. In section 3, we propose a theoretical model to reflect the relationship between valuation index and stock price volatility. section 4 describes the data and estimation results.Finally, section 5 presents the summary and conclusions. II. METHODOLOGY AND PARAMETERS DESIGN

I.

INTRODUCTION

Recently, there has been much research interest in the relationship between stock price and stock valuation index[1-5]. Among them, there are many studies using individual valuation model. They modified the volume or PB,etc.Granted that stocks are indeed difficult to value, there are many people focused largely on expected-return in the future. In contrast, the stock valuation literatures has not made as much progress as its difficulty. However,researchers find some derivative valuation models in their exploring process. Gurdip Bakshi and Zhiwu Chen made a model as equation based on three assumptions:net earnings-per-share,expected earnings growth,and interest rate[6].

1 2 2 2S S 2S 2S yY 2 + (G y )Y + g, y ygY + r, y yrY 2 Y Y YG YR 2S 1 2 2S S 1 2 2S +g,rgrY + r + kr (r R) + g 2 GR 2 R2 R 2 G S +kg (g G) RS +Y = 0 G

The model shows that its vey difficult and not accurate without better assumption. They focus on eps rather than stock dividend. Kyoung-jae Kim and Ingoo Han proposed

Wherever Times is specified, Times Roman or Times New Roman may be used. If neither is available on your word processor, please use the font closest in appearance to Times. Avoid using bit-mapped fonts if possible. TrueType 1 or Open Type fonts are preferred. Please embed symbol fonts, as well, for math, etc. In this paer we are attempt to predict future stock price movements by analyzing a past sequence of stock prices, volume,PB,PS and PC. It relies on the past sequence data to predict stock future value. Investors analyze the fluctuations of stock market by certain price formations and price movements.If investors think the stock price rise,they will buy it. If investors expect the stock price to fall, they will sell it. All these action will take effect on stock price, and cause the stock severely fluctuations. It can chage human expectations and attitudes. Thats to say that even an excellent stock may be less than its true worth. It is very important that investors understand a stocks value. Many inverstors have been focusing on various methods to improve investment returns. Since stock investment process is a very complicated highly nonlinear process, it has no a simple and useful model. We assume that stock price runing process has three stages,such as horizontal fluctuation,speeding rise, speeding fall. The Institutional Investor or main buy stock slowly in horizontal fluctuation stage.This stage is called 1st stage. When they buy enough stock, theyll pull the stock price quikly and attract retail buying stock. We call this the 2nd stage. At last, main get big profit and will sell
479

978-0-7695-4014-6/10 $26.00 2010 IEEE DOI 10.1109/ICICCI.2010.122

their stock.They will sell stock quickly,and it cause the stock price fall quickly. Many retail will be to the bad and lose a lot. This stage is last stage as 3rd stage. We set the variables.Here t is time, t > 0 , x is volume, and y is the stock price.

Cc

T T T = (Kx ) + (K y ) + c (1c + 2s ) t x x y y
(3)

Cb is the PB. Cs is PS.T is PC.

Cc is the cash capacity of a stock. T is the PC. b is the

effective tortuosity of PB to volume and price. effective tortuosity of PS to volume and price. effect coefficient of PB to volume. coefficient of PB to price. PS to volume. price.

is the

Dbx is the

Dby

is the effect

B. Fourth-order algorithm and Discretization of the model In order to discretize the model we introduce the qthorder central-difference operator for the second space derivatives. An overall framework for deriving higherorder finite-difference schemes was proposed by Dablian[4-7]. The qth-order centered finite-difference operator is expressed as follows:

Dsx

is the effect coefficient of

Dsy

2 p x 2
Let q

q/2 1 (0 pr + k ( pr + k + pr k )) x 2 k =1

is the effect coefficient of PS to is the

be

equal

to

4.

we

can

get

bx is the weigth fraction of PB to volume. by

sx is sy

weight fraction of PB to stock price. fraction of PS to volume. to stock price. volume. price.

the weigth

is the weight fraction of PS

Kx

4 1 0 = 2.5, 1 = , 2 = 3 12 ( x, y ) domain into a grid of I by J We divide the where x and y are the grid points. Where
in x and y directions, respectively. Then we get

is the effective transfer rate of PC to

Ky

x = x i, and

is the effective transfer rate of PC to stock

y = j y ,

where

i=1,2,I,

is the proposition of PB transfer rate due to PB is the proposition of PB transfer rate due to PS

change. 2
change.

c is the effective exchange rate of a stock. c ,

STOCK PRICE VOLATILIY FUNCTION CREATION

y is the j=1,2,J. x is the volume increment and price increment. t is also the time increment, and t = k t , where k is the time step with k=1,2,.
Over the above discretization step, we can now describe a finite difference scheme to approximate the solution of PC, volume and price model equations. Traditional ginite methods(FDTD and FEM) are secondorder accurate, thereby restricting the volume and price accurately. In order to reduce dispersion errors, we introduce the 4th-order algorithm to disretize the simulation model.

s is the cash sorption or desorption of PC or PS.

III.

A. model creation We assume these parameters as follow.

b + s + c = 1 , 1 = b 2 = c s , s
2 2 b = bx + by 2 2 s = sx + sy

Cb ( x, y, z ) = Cb (ix, j y, k t ) = Cb (i, j , k ). Cs ( x, y, z ) = Cs (ix, j y, k t ) = Cs (i, j , k ). T ( x, y, z ) = T (ix, j y, k t ) = T (i, j , k ).

We use central finite-difference expressions for space and time derivatives, which are fouth-order accurate in space and second-order accurate in time:
(C ) D b bx bx (D )= [30(C ) 16((C ) ) +(C ) ] +(C ) +(C ) b bx i, j,k b bx i+ , j,k b bx i , j,k b bx i+2, j,k b b i2, j,k 1 1 x 2 b x x x 1 2x

b , s (0,1) .
We analyze the relationship between the volume,stock price and PB,PS and PC.We find some secrets among them. The following system of 2D nonlinear partial differential equations is develeped by us to simulate the volume and stock price flunctuation with PB,PS and PC.

(4)
(C ) D bb y by (D )= [30(C ) 1 C ) 6(( )+(C ) ] +(C ) +(C ) b by i, j+,k b b i, j,k b b i, j+2,k b b i, j2,k 1 y 1 y y 2 b by i, j,k b y y y 1 2y

(5)
(C ) D s sx sx (D )= [3 C ) 1 C ) 0( 6(( ) +(C ) ] +(C ) +(C ) s sx i, j,k s sx i+1, j,k s sx i1, j,k s sx i+2, j,k s sx i2, j,k 2 sx x x 12 x

(Cbby) (Cbb) 1 (C ) = [ (D b bx )+ (D )]b1c bx by t b x x y y (Cssy ) (Css ) 1 (C ) = [ (Dsx s sx ) + (Dsy )]s2c t x y y s x

(1)

(6)
(C ) D s sy sy (D )= [3 C ) 1 C ) 0( 6(( )+(C ) ] +(C ) +(C ) s sy i,j+1,k s sy i,j1,k s sy i,j+2,k s sy i,j2,k 2 s sy i, j,k sy y y 1 2y

(2)
480

(7)

 T Kx (Kx ) = [30T, j,k 16(T+1, j,k +T1, j,k ) +T+2, j,k +Ti2, j,k ] i i i i x x 12x2
(8)

T Ky (Ky ) = [30T, j,k 16(T, j+1,k +T, j1,k )+T+2, j+2,k +T, j2,k ] i i i i i x y 12y2
(9) For the first time derivatives, we have the second-order central-difference operator:

(Cb b ) (Cb b )i , j ,k +1 (Cb b )i , j ,k 1 = , t 2 t

(10)

Shandong Wohua Pharmaceutical Co.,Ltd. During this period. The part data is as table 1. In contrast, in this paper, we report an extensive evaluation of trading rules based on econometric forecasting equations from equation 1 to 12. We use matlab software to simulate the price of WHYY. Moreover, we not only compute the future date but also High and low price in the certain date. The predicating results are reported in table 2. According to the table 2, we can get profit from WHYY in the future. Its very important to investors.
TABLE2 SIMULATED PRICE OF WHYY(002107) AND SHANGHAI INDEX

(Cs s ) (Cs s )i , j ,k +1 (Cs s )i , j ,k 1 = , t 2 t

(11)

Cc
IV.

T = Cc t

Ti , j ,k +1 Ti , j ,k 1 2 t
(12)

DATA DESCRIPTION AND ESTIMATION RESULTS

TABLE 1 PART HISTORY DATA OF 002107

Closed Date volume PB PS PC price 2010-01-04 24.59 1196000 6.34 20.96 23.77 2010-01-07 23.83 1552400 6.14 20.31 23.03 2010-01-08 23.82 1378900 6.14 20.31 23.03 2010-01-11 23.9 1506200 6.16 20.37 23.1 2010-01-22 23.77 1270300 6.13 20.26 22.98 2010-01-25 24.2 1459500 6.24 20.63 23.39 2010-02-04 22.67 967200 5.84 19.33 21.91 2010-02-05 21.96 819900 5.66 18.72 21.23 2010-02-08 21.6 746500 5.57 18.41 20.88 2010-02-09 21.85 434900 5.63 18.63 21.12 2010-02-10 21.95 502300 5.66 18.71 21.22 2010-03-08 23.49 1734200 6.06 20.02 22.71 2010-03-09 23.3 1587800 6.01 19.86 22.52 2010-03-23 22.25 1021500 5.74 18.97 21.51 2010-03-24 22.45 999600 5.79 19.14 21.7 2010-03-25 21.94 982100 5.66 18.7 21.21 2010-03-26 22.1 769500 5.7 18.84 21.36 2010-03-29 22.41 1047500 5.78 19.1 21.66 2010-03-31 22.58 1603900 5.82 19.25 21.83 In the data disposal process, one period of stock data is selected as an experimental stock dataset. This dataset contains five daily fundamental stock quantities(PB,PS,PC, and stock trading volume) and the dailly price. From the history data, we can get , , , , , , , , , , ,

WHYY WHYY Shanghai Shanghai Low High Index Low Index High 2009-7-14 24.25 25.55 3088.58 3147.59 2009-9-20 25.25 27.02 2940.83 3068.03 2009-11-5 25.22 26.1 3122.52 3158.72 2010-1-5 24.01 24.66 3221.46 3290.51 2010-3-14 22.28 22.52 3011.97 3057.52 2010-4-28 24.68 24.92 2891.97 2937.52 2010-4-29 22.28 23.72 2861.46 2907.51 2010-6-28 21.08 22.5 2981.46 3050.51 2010-9-3 19.88 21.3 3060.83 3188.03 2010-10-16 22.28 23.7 3251.97 3278.7 2010-10-17 24.4 26.1 3281 3309 2010-12-20 24 24.8 2771.97 2798.7 From table 1 and simulated results, we know PB,PS and PC has positive effect on stock price. Moreover, the presented new model can predict other individual stock price pridiction in Chinese stock market.In the future research, well improve the model and present more predicting individual stock or Shanghai Index. Date V. SUMMARY AND CONCLUSIONS

Dsx Dsy bx by sx sy K x K y 1 2 c c
, , ,

481

All our data are taken from Wind database. We use daily data on the Chinese stock code 002107 in Shenzhen Stock Exchange from January 1st 2010 to March 31st 2010. we take volume,closed price,PB,PS and PC of

s .

Dbx

Dby

This paper analyze the literature of the newly emerging in stock predicting field. There have been a number of recent studies which explore the secret of stock volotility in the form of predictability in stock returns on the basis of their own past values. None, however, has high accuracy of their predictability. Although it is economically significant,it can not enhance the traders profit. In this paper, we have carried out this step by using partial differential coefficient equation to predict stocks future price. From the results, we can draw these conclusions.First, we showed that the results were of great significance. The predicting stock price is very important to investor. If we know the forecast price, we can get big profit.secondly, the forecasting price is revolved. It is more nearly approximate the actual price. The stock price will repeat again after some time. With less frequent trades, some rules returned a better and result than a buy-and-hold strategy. In the future works, more stock markets or individual stock( such as DJI market and HSI market) can be predicted in forecasting processes by the new model. REFERENCES
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