Extracting continuous futures prices on different dates with the ratio adjustment

Question

I extract continuous prices for a set of futures contracts using Bloomberg. I select the Ratio as adjustment with the Bloomberg default settings.

For instance, to extract the first/forward generic contract with the Ratio as adjustment you add B:00_0_R to the BB Ticker. So for CO1 Comdty you use CO1 B:00_0_R Comdty.

The problem

If you extract the historical values up to today, then the adjusted price of CO1 Comdty on 01/01/1990 is 8.92 (dataset A). However, if you extract only up to 28/04/2017 then the price is 8.79 (dataset B). This difference might not seem a lot, it has however significant implications on the performance.

Moreover, when I backtest my model (lets assume a simple long-only), I obtain a Sharpe of 1.46 with dataset A. However, with the more recent dataset B, I obtain a Sharpe of 1.20. In addition, some years turn negative.

I was wondering whether this is indeed a known issue with futures, and if so how deal with the problem?

Answer 1

When constructing continuous price series you can either adjust for accurate PnL or accurate returns. Ratio adjustment is used to construct an accurate return series. This means that if you're backtest is set up for PnL then it will be incorrect.

Check out this post for more info: https://adamhgrimes.com/how-to-calculate-futures-rolls/

Answer 2

"if so how deal with the problem?"

You could use fixed expiry contracts and build the rolls into your backtest (assuming you hold them over a roll).