Figure 2.2: Two continuous time series of CSCE cocoa futures prices in the period 1982:1-1997:6. The upper time series is constructed by pasting the futures prices at the roll over dates. The time premium of a futures contract leads to price jumps and spurious trends. In this chapter we use the lower continuous time series, constructed by pasting the returns of the futures prices at the roll over dates and by choosing as starting value the futures price of the May contract at January 3, 1983. Any trends that are present in the lower series reflect real profitability of trading positions.

2.2.3  Summary statistics

In figure 2.3 time series are shown of the continuation of the CSCE and LIFFE cocoa futures prices and returns as well as the Pound-Dollar exchange rates and returns for the period 1982:1-1997:6. The long-term and short-term trends can be seen clearly. Each technical trading strategy needs a different time horizon of past prices to generate its first signal. Therefore the first 260 observations in each data set will be used to initialize the trading rules, so that on January 3, 1983 each rule advises some position in the market. All trading rules will be compared from this date. Table 2.1 shows the summary statistics of the daily returns of the sample 1983:1-1997:6 and three subperiods of five years. Returns are calculated as the natural log differences of the level of the data series.

The first subperiod, 1983:1-1987:12, covers the period in which the price series exhibit first a long term upward trend and thereafter a downward trend; see figure 2.3. It is remarkable that the upward and downward trends of both cocoa futures series CSCE and LIFFE (accidentally) coincide with similar trends in the Pound-Dollar exchange rate series. In the second subperiod, 1988:1-1992:12, the cocoa series exhibit a downward trend, while the Pound-Dollar series is fluctuating upwards and downwards. The third subperiod, 1993:1-1997:6, covers a period in which the cocoa series as well as the Pound-Dollar series seem to show no significant long term trends anymore. From table 2.1 it

40