Hi, Apologies for the newbie nature of this question, but I'm relatively new to Futures and am trying to get my head around some of the concepts. I recently subscribed to Quandl's SCF continuous feeds in order to help with analysis. Looking through their documentation, most of it makes sense, but one roll-method they have is open-interest-switch or liquidity-based roll method. This roll-method however comes with a health-warning: However, note that it is completely inappropriate for interest rates futures, and should be used with care for energy and agriculture futures. Google is not being my friend, so could anyone kindly expand a little on : - Why the use of the strong term "completely inappropriate" re: rates futures ? - What sort of "care" I should be exercising when using with energy and agri ? (assuming its sensible to use them at all and not just avoid ?) (https://www.quandl.com/data/SCF/documentation/roll-methodology if you want to look at the source of quotes above).
- It's inappropriate for interest rate futures (specifically, STIR futures), since STIRs represent forward rates with very specific dates. This makes OI switch meaningless for STIRs. - Hard to know what they mean.
Thanks for the pointer on interest rates futures, makes sense, I thought it might be something like that. Glad I'm not the only one stumped by the second point !
I'll tell you what they mean. They are trying to approximate the roll "with the market". ALL futures have official roll dates. But many people for purposes of analysis want to roll "with the market". This leaves two options. Watching for the change in open interest. Or watching the switch over in active volume. The reason you need to be careful is many times the market can distort prices going into delivery in things like energy and grains. This distortion may or may not be important to you depending on how you are analyzing markets i.e. through a fundamental lens or technical one.
Thanks Maverick74. I would be very much in the technical (well, quant-ish) category (although not necessarily ignoring fundamentals altogether), so I'm guessing the obvious answer would be price distortions would most likely be something I'd want to avoid !
The opposite, quant guys focus on price, irregardless of what is causing price to react. Fundamental guys more often then not ignore the distortions unless its caused by fundamentals.