Contango and Backwardation in Data

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nodoodahs
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Contango and Backwardation in Data

Post by nodoodahs » Mon Nov 27, 2006 4:39 pm

Does back-adjusting a previous contract higher imply a contango? If the spot doesn't change, does this "bake in" a profit for a short?

Similarly, does a backwardation imply (1) back-adjusting would result in adjusted data being lower than current and (2) a "free ride" for longs?

nodoodahs
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Post by nodoodahs » Thu Dec 07, 2006 3:07 pm

Woo-hoo! Anybody listening?

I know it's not a sexy question, and probably a stupid one, but I'd appreciate an answer ...

Jason
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Post by Jason » Thu Dec 07, 2006 4:49 pm

Yes. You get the idea.

A contango market with no underlying price movement will produce a downward sloping backadjusted price series and vice versa for a backwardated market.

Backwardation is sometimes called "normal backwardation" as some believe that those who are willing to buy in the future need to be compensated for the risk they are assuming by receiving the roll yield. However, to add to all the confusion, many markets do not normally trade in backwardation. Even those that do can often trade in contango for long periods...witness Crude Oil.

I hope that helps.

Jason

nodoodahs
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Post by nodoodahs » Thu Dec 07, 2006 5:36 pm

That helps a lot, thanks Jason!

I was looking for a control to backtest against, and was using buy and hold a contract as the control to some strategies - and noticed that buy and hold (including rolling commissions) produced losses in some cases, and profits in others.

Also thinking about the cost of somebody holding a long in a contango market and what that might eventually do to the price of the commodity ... when the longs get tired of being eaten away.

yoyo2000
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Post by yoyo2000 » Mon Jan 22, 2007 9:29 pm

Trading on Back-Adjusted continuous futures data,one could get the profit from the difference between entry price and exit price,in this case,it seems that the trading/simulation result have nothing to do with contango and backwardation,for example,(2760-2639)=(3012-2891).

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