tag:blogger.com,1999:blog-35364652.post2660125305502670153..comments2022-01-18T09:16:21.942-05:00Comments on Quantitative Trading: Finding seasonal spreadsErnie Chanhttp://www.blogger.com/profile/02747099358519893177noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-35364652.post-62609327152055795692012-02-19T17:39:28.316-05:002012-02-19T17:39:28.316-05:00Issy:
I haven't used ANOVA that way. But what...Issy:<br /><br />I haven't used ANOVA that way. But what you are proposing closely parallels the monthly analysis and seems reasonable to me. Good luck.<br /><br />PaulPaul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-25711767615044711532012-02-18T12:44:05.566-05:002012-02-18T12:44:05.566-05:00hi Paul, great article.
is ANOVA useful for analy...hi Paul, great article.<br /><br />is ANOVA useful for analyzing seasonality in terms of hour of day?<br /><br />for example; i am working on multi-threshold entry using zscores depending on hour of day. this is due to changes in volatility depending on time of day. <br /><br />This is in a way similar to VWAP algorithims's use of volume curve.<br /><br />thanks.<br /><br />Issy.Alphahttps://www.blogger.com/profile/11487103564597525710noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-10051032577475415382011-03-11T10:52:21.650-05:002011-03-11T10:52:21.650-05:00@Anonymous: Thanks for your note. You've touch...@Anonymous: Thanks for your note. You've touched on an important and tricky subject.<br /><br />My article here uses a price-based definition of spread:<br /><br />S = P1 - (beta * P2)<br /><br />where S is the price-based spread, P1 is the price of market #1, and P2 is the price in market #2. If I understand you correctly, you recommend a returns-based definition of spread:<br /><br />S' = R1 - (gamma * R2)<br /><br />where S' is the returns-based spread, R1 is the return for market #1, and R2 is the return for market #2.<br /><br />I sometimes use the returns-based spread myself, especially for my clients who trade stocks. Since you are familiar with returns-based spreads, I'm sure you are aware that they require dynamic adjustment of the hedge ratio (because the correct ratio changes when the stock prices change). That is feasible for stock traders, but implementing dynamic hedge ratios is difficult when trading futures, especially for smaller accounts. This article focused on futures, so the price-based spread seemed more natural.<br /><br />Speaking of hedge ratios, can you lend any insights into how you handle dynamic hedge ratios yourself? For example, what is your threshold for rehedging? Does it work well?<br /><br />Finally, I'm sorry but I must disagree that "your PNL ... is not at all linked to the spread change." I trade spreads daily, and I can assure you that my P&L is directly and intimately related to the spread change. Otherwise, what's the point?Paul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-47142205919183160682011-03-07T22:53:34.341-05:002011-03-07T22:53:34.341-05:00Sorry Paul, I dont think you are doing it right.
...Sorry Paul, I dont think you are doing it right. <br /><br />"Notice that I compute the spread change, not the spread return. Quants usually study price returns, but that won’t work with spreads because the spread can be zero, giving an undefined return. The daily change follows a similar bell-shaped distribution, so it’s a reasonable object for study."<br /><br />Quants would not consider the spread return, but the return of the basket composed with one long leg and one short leg.<br /><br />This is your PNL and is not at all linked to the spread change.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-84676568051374249002009-12-17T10:43:10.931-05:002009-12-17T10:43:10.931-05:00LH:
I intended the article as an illustration of ...LH:<br /><br />I intended the article as an illustration of a statistical technique, not as a trade recommendation. When trading futures, the technique may lead to different conclusions depending upon how you build your continuous contract data. So the ANOVA analysis is (only) a starting point, directing your attention to examine the contract-level data for seasonal trades.<br /><br />To answer your specific questions, I formed the spread using an ordinary least squares (OLS) fit, as described in Ernie's book. Yes, I would likely trade the spread using the crack ratios instead. (It so happens that the statistical conclusions are are largely identical.)<br /><br />Your choice of delivery month and roll times depends upon how you construct your continuous contract. This example used "Perpetual Contract" data from Commodity Systems Inc (CSI). That data is useful for high-level filters such as this, but I cannot recommend it for trading decisions since their splicing algorithm distorts the contract-level information.<br /><br />PaulPaul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-43572082418486018812009-12-14T17:47:14.963-05:002009-12-14T17:47:14.963-05:00Interesting stuff, but I have a few points Id appr...Interesting stuff, but I have a few points Id appreciate if you could clarify.<br /><br />What way you were calculating the spread. Usually RBOB vs CL would be traded as a crack spread ie RBOB (Converted to BBLs) - CL (BBLS).<br /><br />There is seasonality in the RBOB contract as there there is a different grade of summer and winter gasoline. ie Mar/Apr spread on RBOB is ~ -13cents at the moment while Sep/Oct is ~ +10cents<br /><br />Also you mentioned buying on 1st May, so does that mean you would buy the Jul contract of RBOB as that is the nearest future you can trade without having to roll.<br /><br />Cheers<br />LHAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-38411675951695670162009-04-02T19:42:00.000-04:002009-04-02T19:42:00.000-04:00Any progress on on the buy/sell guidelines? I am ...Any progress on on the buy/sell guidelines? I am intrigued.Greghttp://www.forex-info.comnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-41587766211736259892009-02-24T15:25:00.000-05:002009-02-24T15:25:00.000-05:00Frank,Yes, this technique applies to out-rights, t...Frank,<BR/><BR/>Yes, this technique applies to out-rights, too. I suppose it could apply to <I>any</I> time series, for that matter. I focus on spreads because I believe they present more opportunities for seasonal trading.Paul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-80425583618922947072009-02-24T15:08:00.000-05:002009-02-24T15:08:00.000-05:00Paul,Would this method apply when looking for seas...Paul,<BR/>Would this method apply when looking for seasonality in outright (that is non-spread) futures prices?NoneNOONE NIOENENhttps://www.blogger.com/profile/04240611345249422751noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-55897104329058450112009-02-19T13:05:00.000-05:002009-02-19T13:05:00.000-05:00That's a very good point, Cole. We must never bli...That's a very good point, Cole. We must never blindly believe statistical inference. Common sense and good judgment must play a role, too.<BR/><BR/>A recent scan of my database, for example, showed that British Pound futures and Live Cattle futures are seasonal by the standards of this ANOVA test. Would I trade the BP/LC spread? Heck no, because I don't see any economic logic in the trade.<BR/><BR/>I also like seeing the barchart with confidence intervals, shown above, because I see the actual seasonal pattern. The ANOVA just alerts me to <I>possible</I> seasonality which, as you point out, could be a fluke.Paul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-29123743875025438742009-02-19T12:16:00.000-05:002009-02-19T12:16:00.000-05:00Is multiple testing accounted for?If not, given a ...Is multiple testing accounted for?<BR/>If not, given a p<.05 cutoff, you would expect ~5% of your tested spreads to exhibit 'seasonality' by chance if the spreads are independent.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-642865118616076342009-02-18T17:46:00.000-05:002009-02-18T17:46:00.000-05:00Thanks for your question, Damian. This is not a c...Thanks for your question, Damian. This is not a complete trading system, so I don't have trading results to report. Identifying a seasonal spread is just the first step. Next, we need guidelines for timing our buys and sells to exploit the identified seasonality, and that's what I hope to cover next.Paul Teetorhttps://www.blogger.com/profile/07598717206066693795noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-9268329588946468002009-02-18T13:34:00.000-05:002009-02-18T13:34:00.000-05:00Interesting stuff from Paul - any results on this ...Interesting stuff from Paul - any results on this approach?Damianhttps://www.blogger.com/profile/16016686632386396090noreply@blogger.com