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1999issue C071-3

Testing trend following with cash-price controls

The archive frames futures as risk-transfer venues and applies one frozen trend-following rule to both an equally weighted futures index-proxy and a cash-price-control. The design asks what remains when the same position-direction rule is used in cash markets that do not clear hedger liquidity.

  • Futures markets are treated as risk-transfer venues, so a hedger-imbalance is the state that calls on outside-risk-capital.
  • Trend-following is frozen as one entry, exit, and abstention procedure, then market-regime-classification labels each market by the direction of its price trend.
  • The index-proxy is a continuous, equally weighted, unleveraged futures sleeve used as a stand-in for passive noncommercial trend exposure.
  • The cash-price-control applies the same direction rule to cash prices, which are treated as goods-transfer markets that do not warrant a risk-transfer-payment.
Entries in this reading3 entries
Current trackIndex proxy comparison28 readingsMarket regime classification38 readingsTrend following89 readings

Read the sleeve as a risk-transfer test

Futures markets are framed as venues that exist so commercial producers and primary consumers can transfer unwanted price risk. When producer and consumer hedge demand is not offsetting, the resulting hedger-imbalance leaves outside-risk-capital as the residual supplier of liquidity and risk-bearing.

Hedge demand is described as becoming more one-sided as a price trend strengthens, which increases the call on that outside capital. Outside futures capital is characterized as being organized mainly around a trend-following approach.

Freeze one rule, then classify the regime

Trend-following is a single testable procedure that sets long, short, or flat exposure from a long-horizon price-trend rule and holds for the system period. The evaluation does not change that rule from market to market.

Market-regime-classification labels each market by the direction of its prevailing price trend. Positioning is then treated as a regime choice rather than a one-off forecast.

Compare the index-proxy with a cash-price-control

A passive index-proxy is specified as continuous, equally weighted, unleveraged trend-following across a basket of exchange-traded futures. That construction is used as a stand-in for passive noncommercial trend exposure.

The cash-price-control applies the same position-direction formula to cash prices of the identical markets. Cash trading is treated as a goods-transfer mechanism that does not provide futures-style risk transfer or hedger liquidity.

Cash markets are classified as goods-transfer mechanisms and futures markets as risk-transfer mechanisms. Only the latter is said to warrant compensation to outside risk-takers. Under the hypothesis, that compensation is a risk-transfer-payment that moves from hedgers to the capital that absorbs unwanted price risk.

Keep the two legs on the same markets

The comparison uses 1984 through 1998. A Treasury-bill interest component is removed from the futures leg, and contract start dates are aligned so both legs always cover the same markets.

The evaluation reports calendar-year results and annualized results over three-, five-, ten-, and fifteen-year windows for the cash-rule and futures-rule legs. TradersWeek editorial: those reported windows describe the historical comparison only. They do not establish present-day performance.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 19 in the Index proxy comparison track
20021-3 pp.Next on Index proxy comparisonA capital-preservation case for index-proxy allocationCapital-preservation ranks ahead of capital-appreciation because a book that is not first kept intact never reaches a later growth objective.
All readings on this track · 19 readings
  1. 1992Country regime inside global allocation and index proxies
  2. 1992Intermarket confirmation for long-duration bond-fund timing
  3. 1993Paired bond and currency proxies with weekly crossover confirmation
  4. 1995Walk-forward evaluation of a municipal futures timed fund switch
  5. 1999Regime-gated allocation with bounded index leverage
  6. 1999Testing trend following with cash-price controls
  7. 2002A capital-preservation case for index-proxy allocation
  8. 2003A shared weekly-average grid for four Asian index proxies
  9. 2005Index-etf-core weights, a growth-index-clock, and an implementation-cost-ledger
  10. 2005European index proxies as one weekly-regime panel
  11. 2006Index-fund proxies as intermarket regime instruments
  12. 2006Constructing metal option exposure with mining proxies and implied volatility
  13. 2010Matched straddles on levered versus unlevered index proxies
  14. 2013Inheritance as an index-proxy and allocation case
  15. 2014Headline index levels mix a changing basket with a changing divisor
  16. 2017Screening ETFs by liquidity, index fit, and rank
  17. 2019Leveraged commodity proxies fail the futures test
  18. 2020Constructing pre-listing paths for new fund sleeves
  19. 2020A sleeve after cost-drag, judged by an index-proxy, sized in a stock-bond mix
By fieldPortfolio construction104 readingsBy year199959 readings
All 28 readings tagged Index proxy comparison
Also on Index proxy comparison5 readings
1992Country regime inside global allocation and index proxies2014Headline index levels mix a changing basket with a changing divisor2020A Nasdaq-100 proxy as a construction problem, not a ticker1991Fund-index regime, put-call confirmation, then the tracking fund1991When a narrow index becomes the cash-flow proxy