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I thought of that but thought the correction would be in the wrong direction.
The typical back adjustment (and the one I used in my calculations) simply shifted the price. That would have caused the average return to be larger than using the percentage method, (I think...), making the discrepancy even worse.
As Dennis said, the only correct way is to do the calculations accurately using the actual T-Bill rate and dividend data.
Bob Fulks
At 09:09 PM 10/27/2009, Paratrade Systems LLC wrote:
>Surely YOU explain these huge return variances?
>
>"I use Method 4 - back adjusted - because my objective is to simulate the
>behavior of my trading system on actual contract data as accurately as
>possible. My trading systems use the bar-to-bar price differences so are
>unaffected by adding a constant to all prices. Since method 4 (and method 3)
>maintains the exact bar-to-bar price changes of each original contract, this
>is what I prefer. Needless to say, other people might consider other factors
>more important. I have no interest in having my systems perform more poorly
>on backtesting that they would have on actual contracts. (Maybe you could
>call it some sort of "stress testing".) If I were using a long-term period,
>I would definitely use method 5 - the continuously adjusted contract but
>that is not what I am trading."
>
>-Bob Fulks
>http://www.traders2traders.com/papers/backadjusting_futures_contracts.htm "
>-----Original Message-----
>From: Bob Fulks [mailto:omegalist@xxxxxxxxxxxx]
>Sent: Tuesday, October 27, 2009 1:52 PM
>To: Paratrade Systems LLC; Omega List
>Subject: Re: Recreating the back adjusted vistorical number
>
>I get these numbers:
>
>SP 1.673% per year over 300 months ending 9/30/09
>SPX 7.684% per year over 300 months ending 9/30/09
>
>This is with no dividends on SPX
>
>You are not allowing for the effects of compounding in your calculations.
>
>This still does not look as if it matches but it is closer.
>
>Bob Fulks
>
>At 03:44 PM 10/27/2009, Paratrade Systems LLC wrote:
>>A "prospect" is asking me to reconcile the futures contract with the index
>>price. The back-adjusted contract should factor out (net) carry. If
>>t-bills averaged (for 24 years) 4.35% and dividends averaged 2.1%, then net
>>carry = 2.25%
>>The back-adjusted contract rallied from 665 to 1052 for a gain of 58% or
>>2.32%/yr. So total return = 2.25% +2.32% =4.57%/yr for 25 years.
>>
>>Here's the problem. The S&P index actually rallied from about 175 to 1052
>>WITHOUT dividends for an average return of 24%!
>>
>>To get these 2 returns to match the fwd price of the index has to equal the
>>start price of the back-adjusted contract but that would require a 5.5%
>>carry for 25 years 175*(1+.055)^25= 667
>>
>>What am I doing wrong? Any ideas?
>>
>>CE
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