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mspinola merged 1 commit into from
Aug 1, 2026
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docs: correct the reason crude's back-adjusted series goes negative #87

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22 changes: 20 additions & 2 deletions docs/design/crowdmon_step2_normalisation.md
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Expand Up @@ -133,8 +133,26 @@ has a property that makes it dangerous:
**The error is exactly zero at the present date and grows monotonically backwards**, because
back-adjustment anchors on the most recent contract. So a notional computed from the
back-adjusted series passes every spot check anyone would actually run, and silently
corrupts the entire history a backtest is evaluated over. Crude's back-adjusted series even
reaches **-27.52**, which is not a price.
corrupts the entire history a backtest is evaluated over.

> **Corrected 2026-08-01**, by a test failing against real data. An earlier version of this
> paragraph said crude's back-adjusted series "reaches -27.52, which is not a price",
> attributing it to additive back-adjustment accumulating roll gaps below zero over
> decades. The number is right, the explanation was wrong, and the real one is a better
> argument.
>
> Both series bottom in **April 2020**. What happens is that the single enormous roll gap
> out of the May 2020 contract, which settled at **-37.63**, is propagated backwards
> through every earlier bar. The sharpest row in the store is **2020-04-21**: crude traded
> at **+11.57**, a perfectly ordinary positive price, while the back-adjusted bar for the
> same day reads **-27.52**. Crude was genuinely below zero on **exactly one day**; the
> back-adjusted series is below zero on **64**.
>
> A second claim in the same vein was also wrong: the unadjusted series *can* be negative,
> because 2020-04-20 really happened. So a negative price is not by itself evidence of the
> wrong series, and normalisation code must not clip or reject one. On that day a LONG
> position genuinely had negative notional. What identifies the artifact is that it reports
> a negative price on days the market was positive.

Meanwhile volatility must come from the **back-adjusted** series, because that is the one
with correct returns; unadjusted returns carry fake roll gaps.
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