A Stochastic Model of the Dynamics of Stock Price for Forecasting
A. I. O. Ofomata
Department of Mathematics and Statistics, Federal Polytechnic, Nekede, Imo State, Nigeria.
S. C. Inyama *
Department of Mathematics, Federal University of Technology, Owerri, Imo State, Nigeria.
R. A. Umana
Department of Mathematics, Federal University of Technology, Owerri, Imo State, Nigeria.q
A. Omame
Department of Mathematics, Federal University of Technology, Owerri, Imo State, Nigeria.
*Author to whom correspondence should be addressed.
Abstract
In this work, a stochastic model of some selected stocks in the Nigerian Stock Exchange (NSE) is formulated. We considered four different stocks and their market prices. The likelihood of each change occurring in the stock prices was noted, the drift (the expectation) and the volatility (the covariance) of the change were computed leading to the formulation of stochastic differential equations. Changes in the prices of the stocks were studied for an average of 60 days. The drift and the volatility coefficients for the stochastic differential equations were determined and the Euler-Maruyama method for system of stochastic differential equations was used to simulate the stock prices. With the aid of the simulation we carried out a fore-cast of the prices of the stocks for a short time interval. A consideration of the different stock prices over a period of forty months, stock S1 seems to give the best return on investment compared with stocks S2, S3 and S4. The investor after observing the trend over longer period can invest in the stock that will yield the best returns. Our analysis enables us to compare as many as four stocks in order to advise the investor on where best to make investment.
Keywords: Stochastic model, drift and volatility coefficients, Wiener process, Euler- Maruyama.