Calendar Spreads tend to bear more risk than Outright futures?

Discussion in 'Strategy Development' started by OddTrader, Jul 19, 2008.

  1. "Calendar Spreads, Outright Futures Positions, and Risk"

    "Results indicate that calendar spreads tend to bear
    more risk, in the form of higher kurtosis than outright
    futures, after adjusting the two positions for comparable
    values-at-risk. These relative risks should be taken into
    account by practitioners when trading spreads, and by
    exchanges when determining relative margin requirements"

    Very interesting study!

    Any comments?
  2. Confirmation of the obvious.......

    1) As the article said, don't go crazy with excessive position size. 2) Financial futures calendar spreads are "safer" because those spreads are defined more strongly by short-term interest rates.
    3) Physical commodities calendar spreads are "riskier" because there's potentially no limit to the premium of the front-month over the back-month.
    4) Calendar spreads tend to be more stable most of the time but not all of the time.
  3. TraDaToR


    This paper seems weird to me.

    First, they found that kurtosis is more important in spreads than outrights. In my understanding, kurtosis in distribution is what makes trend methods work( because of large exceptional winning trades ), but they said that the moving average method worked better on outrights. ????

    Second, at a time ,I was trading energy and metal calendars, and mean reversion methods seemed really better, in tests and live trading. Perhaps, it depends on the time frame, but it is intriguing...

  4. I just briefly read the article and intend on re-reading it later.

    I think that it makes sense that the kurtosis would be higher for spreads because of:
    1) Smaller variablility within the distribution of daily % changes will reduce the std. dev.

    2) Larger relative impact of 'outlier' events such as the March 08 Minneapolis Wheat move, Natural Gas Prices around hurricane season etc.

    The combination of a reduced std. dev & infrequent fat tail type moves would seem to account for the overall findings of the paper.

    I think it would be interesting to look at a chart of how much time the spreads spent outside of -3 or +3 std. deviations from the mean.

    BTW - Google Scholar is great at finding papers like this & saves a considerable amount of time searching for them.

  5. TraDaToR


    I think I get it now... What is statistically considered a fat tail for spreads wouldn't be considered one for outrights because of the less important standard deviation?

    Still , who trade trends on spreads and who trade mean reversion here?