[R-SIG-Finance] Generating a front month only Time Series for Futures Prices

[G See]

John,

I think you probably meant to send this to the list instead of just
me; apologies if not.

I agree that when possible, you should avoid building continuous
series.  Nonetheless, that's what the OP asked for.

Sometimes, there is value in analyzing a long history of data (for
example when analyzing risk) and in such cases, a constant maturity
future makes sense.

Also, if your time-frame is short and you're careful about how you
adjust and how you use the adjusted data, I think it can be useful.

The OP wanted to combine and not adjust, which, IMO is more dangerous
than combining and adjusting.  If you're going to combine the price
series of 2 different expiration months, then you have to adjust for
the roll.  Otherwise, you may see a trend or mean-reversion where
there isn't one, or worse, the opposite is actually occurring.

Your point about this being a difficult thing to generalize (e.g.
different grades for different expirations, or first notice day being
different than expiration, etc.) is valid.

Regards,
Garrett

On Thu, May 10, 2012 at 12:48 PM, BBands <bbands at gmail.com> wrote:
> I feel that reiterating my prior warning is worthwhile. The proper way
> to do this is to analyze the actual contracts and roll just as you
> would have to if you were actually trading; exit the current contact
> when the crowd moves enter the new actively-traded front month and
> account for each separately. I coded this in Python and it works well,
> but I have yet to tackle futures in R. Some problems: In some
> commodities not all months actually trade actively. Backwardation and
> contango can impact the rolls dramatically. While analyzing months in
> delivery may seem OK, traders avoid them. None of the shortcuts that I
> know of comes even close to approximating the realities of the
> marketplace. Most analysts (including most of the tblox crowd) simply
> ignore these problems, analyze continuous contracts and are burned
> when they enter the marketable.
>
> Current example problem: Different crude contracts track different
> delivery venues and are priced differently. Think WTI versus Brent,
> spread truculently running tin the $10 range, which not too long ago
> was thought 'impossible".
>
> This is a very deep well.
>
> Best,
>
> John