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?
Contango and Backwardation in Data
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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
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
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.
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.