Testing Whether Less Liquid Futures Improve Trend Following

Summary

The document outlines a test of whether trend-following strategies perform better in less liquid futures markets, or whether any apparent advantage comes from diversification. It frames three possible sources of CTA outperformance: stronger pre-cost returns, diversification benefits, and trading costs. The author focuses on futures markets and relates the question to the small-cap effect in equities.

Trend performance is measured with the Sharpe ratio of a volatility-sized EWMAC trend signal. Liquidity is measured as the log of a rolling average of daily futures volume, expressed in annualised risk units. The dataset includes 205 instruments and roughly twelve years of volume history. The author keeps markets that may be expensive or restricted to trade, while removing duplicates and instruments with unusable data or spread structures. The supplied text contains methodology and section headings, but no reported results, so it does not establish whether low liquidity predicts stronger trend returns or diversification. The liquidity proxy and instrument selection also limit what the test can show.

Key ideas

• The study asks whether less liquid futures improve trend following through returns or diversification.
• It measures trend performance with the Sharpe ratio of a volatility-sized EWMAC signal.
• It uses log rolling futures volume in annualised risk units as its liquidity measure.
• The dataset contains 205 instruments and about twelve years of volume history.
• The supplied text describes the design but omits results, so no conclusion is supported.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.