Quantpedia – Continuous Futures Contracts Methodology for Backtesting


Visit: Quantpedia


The problem with spliced futures

No doubt, the correct datasets are the key when one does some analysis in the financial markets. For some financial instruments, the data can be found for free and ready for the upcoming process, but on the other hand, some instruments are more complicated.

Nowadays, futures contracts are widely spread and popular among practitioners. However, each delivery month is connected with a different price where the price of the underlying asset should stand at a given date in the future (the expiration date). Clearly, this complicates any possible analysis, since there are different prices for different maturities. The industry standard for backtesting futures strategies is to construct one data sequence from a stream of contracts – a continuous futures contracts data series.

If somebody wants to hold futures contracts for a longer time, one has to roll the contracts each month, but there is a problem that the prices would be different. For example, at a rolling date, the contract ending in May can be traded for 60 dollars, and the contract ending in June can be traded for 70 dollars.

Algorithms for creating continuous futures series and removing the jumps are dependent on two main factors. It is important to choose the date when the successive contracts are rolled and secondly, which adjustments would be made to the raw contract prices. Since there are many options for both key elements, there are many variations of continuous futures contracts series.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Quantpedia and is being posted with permission from Quantpedia. The views expressed in this material are solely those of the author and/or Quantpedia and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.