Building Continuous Futures Series with Roll Adjustments
Summary
The document explains how to stitch successive futures contracts into a longer time series for analysis when each individual contract has limited history. Simply joining contract prices can create artificial jumps because adjacent expiries may trade at different prices. It presents three ways to handle rolls: proportional adjustment, which rescales earlier prices to preserve percentage moves; backward or forward additive adjustment, which shifts prior or later data by the price difference; and a perpetual series, which blends near and farther contracts using changing weights, often based on volume, open interest, or time to expiry.
The article says there is no universally best construction. It associates additive adjustment with short-term technical analysis, proportional or rollover methods with long-term trends and backtests, and weighted rollover series with statistical analysis. Each method changes the historical price series and has limitations: additive shifts can eventually produce negative values and distort percentage returns, while proportional scaling preserves percentage moves. The examples are illustrative; the document does not compare methods through empirical trading results.
Key ideas
- A continuous futures series combines successive expiries to extend the historical data available for analysis.
- Naively appending contracts can create false price gaps at roll dates.
- Proportional adjustment rescales earlier prices and preserves percentage moves, while additive adjustment shifts prices by a fixed difference.
- A perpetual series blends nearby and deferred contracts with weights that change as expiry approaches.
- Choose an adjustment method based on the analysis, since each method transforms historical prices differently.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.