Building Continuous Futures Series Across Contract Rolls
Summary
The discussion clarifies that the ETF trick question is about constructing a continuous time series from successive futures contracts, commonly called spread adjustment or handling the roll. It describes back-adjusting as a common approach, while noting that it can create negative historical prices. Forward adjustment starts from the oldest contract and adjusts toward the newest, while ratio adjustment aims to preserve the return distribution more closely.
Series construction also requires a roll-timing rule, such as rolling near expiration or using volume or open interest. No method is universally correct: adjustment and timing choices each have tradeoffs, and the best choice depends on the intended analysis and practical circumstances. The document outlines alternatives but gives no comparative tests or detailed implementation instructions, so it serves as a guide to the decisions involved rather than a prescribed recipe.
Key ideas
- A continuous futures series requires adjustment for price differences between expiring and replacement contracts.
- Back-adjustment is common but can produce negative historical prices.
- Forward adjustment and ratio adjustment offer different ways to handle contract rolls.
- Roll timing can follow expiration dates, volume, open interest, or a calendar rule.
- The appropriate adjustment and timing method depends on the use case and its tradeoffs.
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# The ETF trick - E-mini S&P 500 Futures # The ETF trick - E-mini S&P 500 Futures In Advances in Financial Machine Learning, Marcos Lopez de Prado talk about what he call the ETF Trick. I understand it is about building a time series from another time serie, with the aim to reflect the value invested. It is built taking different costs into accounts, around discontinuities of the first time serie. As I understand it, it is like going out of the position before the discontinuities and looking what you can get after the discontinuities. An associated exercice is to use the ETF trick on a E-mini S&P 500 futures tick data to 'deal with the roll'. However : (1) the only data sources I can find for E-mini S&P 500 futures appears to be quoted in dollars. And (2) I am not sure to understand how this would work for a given time serie. So how would that work here ? ## Answer by Chris (score 3) https://quant.stackexchange.com/a/51164 @lcrmorin, what they're describing in the github repo you linked to has to do with creating continuous time series from underlying futures contracts, it's not a 'trick' per se. This is also called spread-adjusting or dealing with futures roll spread. There are several ways to deal with it, back-adjusting probably being the most common but can result in a time series with negative prices. Also, forward or front-adjusting, where you start with the oldest contract and spread adjust toward the most recent contract. You can also ratio-adjust to better preserve the underlying return distribution. After deciding how you'll roll, you then need to decide the timing of the roll (last day of trading, using some combination of volume or OI to make the decisions, timing rules (eg, two weeks before expiration, etc)). There isn't really a 'right' way to do it, and there are pros and cons to each. The best method usually depends on what you're trying to do and personal circumstances. This thread appears to talk about some of the implications and links to a few other resources that may be useful.
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