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I would like to be able to analyse futures prices as one continuous time series, so what kinds of methods exist for combining the prices for the various delivery dates into a single time series?

I am assuming you would just use the front date for most of the time, and then combine this into some kind of weighted combination of the front and second month to simulate the roll.

A quick Google search has shown that there seems to be a number of methods for doing this. Are any considered standard?

In terms of my ultimate goal, I would like a single time series of prices (I can live with just using closing prices rather then OHLC data) so that I can estimate historical volatilities in the prices.

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I can't comment on what is "standard" but since your goal is to estimate volatility then I would recommend the ratio adjusted method. Use the front month contract, "rolling" to the next month when its open interest is greater than the contract about to expire. –  Joshua Chance Feb 11 '11 at 10:22
@ Joshua Chance : I think that if you give a precise definition of what " ratio adjusted method" is exactually, you can make this a correct answer. Regards –  TheBridge Feb 11 '11 at 13:09
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2 Answers

up vote 6 down vote accepted

If your intention is to use the resulting continuous contract time series to perform return based calculation as would be the case with a volatility analysis then what you want to use is the ratio-adjustment method.

If you are happy to roll on a single day this is trivially implemented by taking the ratio of next contract settlement price to leading contract settlement price on the roll day, then multiplying all historical leading contract prices by that ratio and repeating the process backwards along the contract history.

This will result in a time series that exhibits the returns of an excess return commodity index. Note that benchmark commodity indices roll on a multi-day window, e.g. DJ-UBS or GSCI roll in 20% increments over 5 days.

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I think the key here is consistency in your analysis.

I would use (and do so for my research) the nearby contract(s) - the daily close and roll over on last day of expiry. From my experience this is the best way to approach analyses such as volatility and comparison between different time series...

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If the intention is to assess or construct actual trading strategies a rollover on the day of expiry is not advisable. With many commodity futures contract series the first notice day precedes expiration by weeks. After first notice volume will typically drop off dramatically as the only holders left are commercials intending to take or perform delivery of the physical underlying. –  David-Michael Lincke Jul 7 '11 at 9:48
@Val I disagree somehow. As far as ag futures are concerned that often happens that the front month contract skyrocket during the last trading days (on Euronext Liffe Paris futures prices sometimes skyrocket by 20% in only 4 or 5 sessions. But, this is technical (maybe short covering), and the volumes may yet be very low, and thus price moves not representative of anything. –  edouard Jul 15 '12 at 21:39
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