- High index capacity is very challenging when based on a limited market set, with large difference in liquidity.
- Here we use average volume within one month from planned roll date, e.g. about 60’000 lots from RBOB gasoline over the last 10 years, translated into notional value using an average price over last 6 months.
- The ability to only rebalance index weights according to a small fraction of daily volume limits the possible market weights, and in particular for the least liquid markets since volume differ by more than one order of magnitude.
- For a large allocation to the CML long-only index, e.g. 500M USD, the low number of active signals per day together with liquidity only allowing a small fraction to be allocated to each market, will limit the index capacity.
- Therefore, complementary market signals will be important also in order to share allocation capacity.
(* The returns used are based on the front month contract for each market, typically rolled a couple of weeks before the contract expiry)