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Hi Chuck –
There are several ways of back adjusting
for splits and dividends. Most data vendors adjust for splits by using a
proportion method – a $100 stock that splits 2:1 becomes $50. And
most adjust for dividends by just subtracting the amount of the dividend –
a $20.00 stock that pays a $.30 dividend just drops to $19.70.
The issue is clearer when compared with the
problem of combining individual futures contracts into a continuous contract.
Users are given the raw prices for each contract for each trading day.
Depending on the commodity, each contract is active for six to nine months, and
is “the front contract” or “front month” where most of
the trading takes place for one to three months. System developers who
want to test over periods longer then a few months stitch together several
individual contracts into a “continuous contract”. Conceptually,
construction of the continuous contract starts with the most recent front
month. Going back in time, as it becomes less active and overlaps with an
earlier contact that was then the front month, prices from the recent contract
are dropped and prices from that earlier contract are appended. Since the
two contracts traded on the same days, but have different prices (due to
carrying costs, etc), an adjustment must be made. If a ratio of the prices
of the two contracts being joined is used, then the earlier prices will not
become negative. But the “prices” created are artificial –
and all trading methods using this type of continuous contract Must use
percentage changes when comparing two trading days. If the difference
between the prices of the two contracts being joined is used, then earlier
prices can become negative. Using this type of continuous contract, any
calculations that use ratios or percentage changes will be distorted, but price
differences will be correct.
When stocks pay dividends in the usual
way, the amount of the dividend appears to be a drop in the price of the stock
by the amount of the dividend on the day the dividend is paid. For stocks
with long histories of paying significant dividends, this results in a serious
distortion. It could be partially corrected by adding back the dividends,
which would create a price history that would show earlier prices to be higher
than the historical data shows. One effect of having historical data
missing the dividend amount is that trading systems that use ratios are being
distorted in the same way that they would be on continuous contracts adjusted
by price difference.
When stocks pay large dividends, or spin
off subsidiaries, the data vendor has a choice to make – use a ratio or
use a price difference. Sometimes we know what they did, sometimes
not. Sometimes the company accounting department offers guidelines,
sometimes not. In either case, we need to be aware that the methods we
use in our trading systems may be distorted by the methods the data vendor used
to adjust the price for dividend or split.
Thanks for listening,
Howard
-----Original Message-----
From: Chuck Rademacher
[mailto:chuck_rademacher@xxxxxxxxxx]
Sent: Tuesday, January 06, 2004
11:12 AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: RE: [amibroker] dividend
(more on the subject)
Hi Dingo,
Yes, prices can go negative as a result of
backadjusting for dividends because the dividend is subtracted.
Although there is a very logical reason as to why they are subtracted, I simply
cannot come up with the reason at the moment. Perhaps Howard or
someone else can jump in here and help me out? If I can
remember the reason before someone else comes up with it, I'll be back to you.
<font size=2
face="Times New Roman">-----Original
Message-----
From: dingo
[mailto:dingo@xxxxxxxxxxxx]
Sent: Tuesday, January 06, 2004 10:01
AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: RE: [amibroker] dividend
(more on the subject)
I'm a little confused by the "prices
can go negative" part. Is this because the dividend is subtracted
from the price? Wouldn't a "better" solution be if you did a
"percentage" calculation somewhat like a split?
d
<span
>-----Original Message-----
From: Chuck Rademacher
[mailto:chuck_rademacher@xxxxxxxxxx]
Sent: Tuesday, January 06, 2004
4:04 AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: RE: [amibroker] dividend
(more on the subject)
G'day, b...
Another country heard from on the subject
of dividends!
IMO, the BIG dividends could be considered
to be rare. However, a dividend of 10%, while not BIG, can still
affect the P/L and indicator calculations. Sometimes a company will
float a division or subsidiary, issuing stock in the new company and reducing
the price of the original stock by the same amount. It is not
unusual to see 50% falls in price arising from situations like
this. I could run some stats for you, if you feel it is important
to know that much about the scale of the problem.
I would hope that TJ might think this
subject is important enough to give some consideration. In order
for that to happen, enough users would have to:
a. understand the problem.
b. believe that it is serious enough
that it should be fixed
c. convey that message to TJ.
If TJ was to address the problem, there
still is the issue of how the information gets into the database. I
hate to bring up CSI again, for fear that users here will soon think that I
have some sort of financial interest in the company. I can assure you
that I cannot benefit in any way by people subscribing to CSI.
With that (hopefully) out of the way, let
me describe how my own trading software works. By the way, my
software is not for sale, so there is no potential conflict in tellying you
about it.
My database, thanks to CSI, has a record
of every dividend and dividend date. This information is available
directly from CSI. In fact, with CSI you can backadjust your data to
include or exclude dividends. Obviously, the difference is
the amount of the dividend. Backadjusting for dividends,
however, creates a new problem; prices can go negative when backadjusting over
several years. My method of getting around this problem is to
backadjust over a moving window that is large enough to properly calculate the
indicators being used by the system. Since my database has dividend
dates and amounts, I am able to do this backadjusting on the fly.
Yes, it slows things down. No, I don't turn the feature
"on" during preliminary research of new system(s) and/or
parameter(s). I only turn it on in the later stages of my research
in order to get an accurate picture.
I hope that the above helps people to
understand the significance of the problem. I don't recall it every
being mentioned on this or any other Yahoo board. I can assure you,
however, that the subject takes up a lot of my time and effort.
<font size=2
face="Times New Roman">-----Original
Message-----
From: b [mailto:b519b@xxxxxxxxx]
Sent: Tuesday, January 06, 2004
1:59 AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: RE: [amibroker] dividend
(more on the subject)
<font size=2
face="Courier New">Chuck,<font
size=2 face="Courier New">
I am convinced. Dividends are bad news. And with
recent US tax changes they will not
be going away anytime soon.
Are the big dividend payouts rare enough that they
can be ignored in practice?
I hope the answer is Yes, because I can not see
any easy way to compensate (other
than manually checking all trade candidates for
recent dividends - too much tedious
work for my liking.)
b
--- Chuck Rademacher
<chuck_rademacher@xxxxxxxxxx> wrote:
> Another reason why I say that dividends are
the BIGGEST PROBLEM with data is
> that not only did $11 disappear in one day
from the stock in question
> (causing a loss), it also severely distorts
ALL technical indicators. Such
> a move could look like a SERIOUS BREAKOUT
when, in fact, it's nothing but a
> dividend.
> -----Original Message-----
> From: indiana0352
[mailto:cs_winn@xxxxxxxxxxx]
> Sent: Monday, January 05, 2004
9:34 PM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] dividend
>
>
> Does anyone know how I can
compensate for large dividend payments
> made by companies in the stock
prices in AB??
>
> eh NCRX which paid out a
$10.92 cash dividend on Dec 2, shows in AB
> as dropping significantly that
day when really it didn't.
>
> The only way I could firgure it
out would be to do a reverse
> division and calculate a split
value which I enter. Is there an
> easier way?
>
> TIA,
> Chris
>
>
>
> Send BUG REPORTS to
bugs@xxxxxxxxxxxxx
> Send SUGGESTIONS to
suggest@xxxxxxxxxxxxx
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