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rexd


Total Posts: 3
Joined: Sep 2016
 
Posted: 2017-01-25 17:28
Hi,

I'm looking to do some rolling-window based correlation-ish analysis of some pairs of stocks and some commodity futures contracts. The market data I'm starting with is hourly OHLC last prices.

The challenges I'm running into are (1) smoothing the intraday stock prices around dividends and (2) active futures contracts changing from one delivery month to the next.

Can someone explain some best practices for creating data sets of adjusted market prices for these instruments? Ie some sort of "wedge" to subtract from the stock prices for the increase in price due to expected dividend payment? For the futures, I have the calendar spreads available too but am curious how folks decide when to switch from one contract to the next, if that question makes sense.

Thank you,

Rex

djfostner


Total Posts: 20
Joined: Oct 2008
 
Posted: 2017-01-26 00:31
I'm afraid I can't be of much help in the equity space with your dividend problem, but might be able to shed a little light on the futures issue. Futures rolls are usually handled differently depending on the asset class. For firms trading the futures contracts just to get exposure to the underlying, there are a few simple methods I've seen used. First would be trading the front month future until the daily volume in the longer dated contract (usually 2nd month, but not always) is higher. Second would be trading the front month until the open interest becomes larger in the longer dated contract. Lastly, would be trading out of the front month contract a fixed amount of time before First Notice/Last Trading day to avoid being assigned. The amount of time varies greatly based on the strategy and the liquidity requirements it has in order to remain trading, and also in order to liquidate the position. The most common length of time I've see for funds, CTA trend followers, or larger prop strategies is ~2 weeks before first notice day. If you're just using the price as an approximation, some people use continuous contracts (dynamically weighted combo of the front two contracts seen most referenced in risk stuff related to Carol Alexander's work ) although they're not tradable so probably not useful for your cause.
Otherwise, there are also many people who have had successful careers trading nothing but roll periods. They, along with most people who trade single commodity curves, probably would have a great deal to add, if you could ever get them to talk. You may have better luck from the futures/ETF or futures/spot crowd, as they may also have something interesting to add about targeted carry rates that might be useful information without risking giving away any alpha. Good luck, and feel free to shoot an email my way if you have any additional questions.



chain_reaction


Total Posts: 2
Joined: Feb 2017
 
Posted: 2017-02-08 21:14
Concerning dividends: You could use an approach similar to what performance indices like S&P500 use. Simply 'reinvest' the dividends. More specifically, if your window includes a dividend given as a percentage of the current price, add this percentage to all subsequent prices.

HitmanH


Total Posts: 398
Joined: Apr 2005
 
Posted: 2017-02-08 21:26
What chain_reaction suggested is the most common method - maintaining an adjustment factor - which is a multiplier - and that captures divs - and also stock splits too.

You have a price as recorded on date, adjustment factor - and from there you have a view / computed table - than is 'cleaned' - and all analysis is performed on that.

sigma


Total Posts: 105
Joined: Mar 2009
 
Posted: 2017-02-08 23:20
The dividend on stock/ETF position is accrued before the open. In fact, if you are long deep itm American call you can exercise it (send notification to your broker) on the day prior to the ex-day before 4.30 PM. Next morning you get the stock and the dividend accrued before the open. There is no need for an intraday adjustment.

On the other hand, when you do back-testing or signal estimation it is always best to work with actual prices not those adjusted for dividends. I always have an extra handler to treat the dividend payments.

Another thing to know is that for splits the data providers (Bloomberg) provide unadjusted open/high/low/close prices but they do adjust the past dividends /EPS for splits.

For stocks and ETFs and options on these, the splits and dividends (and spin-offs in particular) are a nightmare in general, but you need to tackle them properly.
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