Building Continuous Futures Series with Weighted Contract Rollovers
Summary
The document explains why futures backtests need a method for joining contracts with different expiries and prices. It compares three approaches: Panama adjustment, proportional adjustment, and a rollover series that blends adjacent contracts over several days. Panama adjustment smooths price gaps but can create drift, negative historical prices, and unreliable returns. Proportional adjustment preserves percentage returns but can distort strategies that rely on absolute price levels.
The article implements a weighted rollover for WTI crude oil futures. It assigns declining weight to the expiring contract and increasing weight to the next contract over a chosen number of business days, then combines the settlement prices into a continuous series. A two-contract example illustrates a smooth transition. The method can support backtesting and strategy research, but it requires positions in both contracts during the roll period, which may increase transaction costs. The example uses historical contract data and does not establish that the resulting series reproduces actual trading costs or execution.
Key ideas
- Futures expiries create overlapping price series that require a contract-selection or stitching rule for backtests.
- Panama adjustment removes price gaps but can introduce drift and make returns misleading.
- Proportional adjustment preserves percentage returns but may require adjusting absolute-price trading signals.
- A weighted rollover gradually shifts exposure from the expiring contract to the next contract.
- Blending contracts across the roll period may increase transaction costs because both contracts are held.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.