Choosing Return Prices and Accounting for Dividends in Trading Models
Summary
The discussion considers which prices to use when building and evaluating a daily stock trading model. It recommends adjusted closes over unadjusted prices because adjusted data account for dividends and avoid treating an ex-dividend price drop as a misleading short signal. A price-only return around an ex-dividend date can show a loss even though the dividend is part of the stock’s economic return, so the return series should include dividends even when a strategy does not hold the stock long enough to receive them.
The replies also flag execution assumptions as a separate concern: a closing auction price is not known until the auction ends, and a strategy’s own order may affect that price. Thus, adjusted closes improve return measurement but do not by themselves make a backtest realistic. The discussion does not specify a full trading or execution model, and the appropriate price series still depends on when the strategy can trade and how its orders are filled.
Key ideas
- Adjusted prices account for dividends and are generally more informative than unadjusted prices for measuring stock returns.
- Price-only returns around ex-dividend dates can misrepresent the stock’s economic performance.
- A strategy may need to account for dividends in its return data even if it does not personally receive them.
- Closing prices can create unrealistic backtests because the auction price is unknown beforehand and can be affected by the strategy’s order.
Tags
Full text
# What kind of returns should I use for my model? # What kind of returns should I use for my model? I'm building a machine learning model with the aim of learning a daily strategy of buy or sell the stock. I was wondering if I should use adjusted close price or something else to calculate returns (I was thinking about considering open price/close price the day before) and to evaluate the strategy. I know that adjusted prices offer a better representation of the price as they account for dividends and other things, but with in that way the results I would get are they consistent with reality? In other words, I fear it may happen that a strategy which is successful for returns calculated through adjusted prices would be not the same in a realistic world. ## Answer by kurtosis (score 1, accepted) https://quant.stackexchange.com/a/57620 You can use the adjusted close price; it is far better than using unadjusted prices and having your strategy tell you to short a stock on its ex-dividend days. The bigger issue is using closing prices -- adjusted or unadjusted. Closing prices are determined by an auction and the presence of your order in the auction will change the auction price. Furthermore, you do not know what the auction price will be until the auction is over. Many supposed trading strategies falter on this issue. ## Answer by Dimitri Vulis (score 0) https://quant.stackexchange.com/a/57619 Tautolotigally, a stock holder receives the dividend if they're the stock holder of record on the record date. Even if your trading strategy assumes that you will put on some position at the beginning of the day and then always flatten before the close, keeping no risk overnight, whatever information is contained in the return series assumes that somebody will pay for receiving the economic benefit of the dividend at the ex date close. The price-only return between the ex date close and the next day open shows a loss equal to the dividend and is just meaningless. You should include the dividends in your returns, even if you never receive them using your trading strategy.
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