Simulating Fundamental Analysis of a Firm Using a VECX Model

Abstract

The study aims at simulating and forecasting a company’s stock returns and prices by a fundamentalist analysis process based on a Vector Error Correction with Exogenous Variables (VECX) econometric model. To achieve this, we selected relevant fundamentalist indicators and specified a model capable of simulating a fundamentalist analysis of a Brazilian publicly listed company, Sadia S/A. The VECX model statistical validation was carried out by performing unit root tests, cointegration tests, Granger causality tests, correlation analysis, impulse-response functions, and variance decomposition. Data taken from the firm’s financial statements were used to compute seven fundamentalist indicators, which were defined as the model’s endogenous variables. The exogenous variables included in the model are the Brazilian Stock Market (Bovespa) Index return, the Brazilian GDP, the Brazilian basic interest rate (Selic), the US$/BRL exchange rate, and the international price of commodities poultry and corn. The final version of the estimated model takes into account cointegration relationships among the endogenous variables. Based on this model, the Company’s ex-post forecasts of the fundamentalist indicators were obtained, as well as its stock return and price forecasts. The results show that the simulation by a VECX econometric model is robust as seen by the quality of the forecasts obtained. Finally, a prognostic fundamental analysis was carried out based on the forecasts.