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So for the backtesting , is it necessary to make an adjustment for the last day of the current contract and the first day of the next far contract? Even if there's is a gap, that's the actual price, u can't avoid the roll yield.

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Yes, you do need. Back-testing without contract rolling will result in artificial profits or loss that are not realizable in live trading.

Suppose a particular market is in backwardation, a positive roll yield is therefore expected. To roll into the longer out contract upon expiration, you expect a lower price to establish the new position. So in live trading, you will unwind the current contract before expiration at the prevailing rate, and take the same position in the next contract. This process is called rolling, and you will realize no gains or loss, assuming transaction cost is negligible.

To simulate this process in back-testing, you will make the continuous price series, so the artificial price gap in the rolling day is filled. Otherwise, assuming you have a long position upon expiration that you will hold overnight, the back-testing will show an artificial gain in portfolio values if the market is in backwadation, or an artificial loss if the market is in cantango.

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in live trading, you will unwind the current contract before expiration at the prevailing rate, and take the same position in the next contract. This process is called rolling, and you will realize no gains or loss Why there's no gains or loss? I thought the gap also exists in real life future market. –  Xun Bao Jul 14 at 11:57
    
Hi Bao: they are different contracts, to roll over, you need to perform two steps: 1) unwind the position in the near contract, 2) and establish the new position in the longer out contract. Imagine you are currently long, the near future is traded at 100 and the far contract is at 95. To roll over, you will sell the near contract at 100 and buy the far contract at 95. Since futures market is marked to market, the unrealized profit in your previous near contract position will be realized, and your new position in far contract will show no profit. Your portfolio will show no net profits. –  Simon Jul 14 at 12:08
    
Thx. It took me a while to follow u ${\tt :-)}$ –  Xun Bao Jul 14 at 13:07
    
You are welcome. –  Simon Jul 15 at 5:14

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