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To: David E. Taylor who wrote (130844)	6/4/1999 9:21:00 AM
From: arthur pritchard	Respond to of 176387

david: <stochastic differential> hi..i was not poking fun at the math...just trying to have a little fun with freeeeus...because i know how much she is into these things...btw i am very glad for your input here, and in no way would want model comments reduced etc.etc...

To: David E. Taylor who wrote (130844)	6/4/1999 4:03:00 PM
From: Chuzzlewit	Read Replies (3) \| Respond to of 176387

David, I think you are fooling yourself with this kind of approach. Ultimately, stock prices are determined by perceptions of future cash flows and interest rates. Unfortunately, neither of these parameters are predictable. So what you will end up with is a model that does quite well at mimicking past behavior, but is incapable of predicting the future. Look at it this way: Greenspan and the Fed indicated that their econometric models were woefully inadequate at forecasting the economy over the past several years. Econometric models are dependent on economic relationships, and tend to be much more sophisticated (and accurate) than the more naive kinds of models you are talking about. And in this case we are talking about only one of the underlying factors determining stock price. As the number of required parameters increases, the complexity of the models grows hyperbolically. The same problems exist with earnings forecasts. Hitting eps is more magic than science because, in addition to macro-economic parameters, you also have unpredictable management decisions such as strategic decisions to change prices, alter the sales mix and increase or decrease the share repurchase plan, or how many options will be issued. I don't believe that these parameters can be modelled either deterministically stochastically. TTFN, CTC