Cumulative Product of Returns from Daily to Monthly Data

Cumulative Product of Returns from Daily to Monthly Data

The Problem:

We want to find cumulative product of returns from daily to monthly frequency. That is we want geometric cumulative returns in the fashion;

Cumulative Product = (1+R1)*(1+R2)*(1+R3)*......(1+Rn) - 1

Solution: 

First we shall prepare our data, so imagine you have returns data in daily format where variable date tracks the data datewise. To generate sequential monthly identifier, we shall use:

    *Data Preperation

    *--------------------

    gen year=year(date)

    gen month=month(date)

    *one month serial number

    *----------------------------

    sum year

    scalar min = r(min)

    scalar max = r(max)

    gen mon_ser = (year - min)*12 + month

    sum mon_ser

    sca minm = r(min)

    replace mon_ser = mon_ser - minm + 1

    *One month serial number generation completed

We are ready to generate monthly geometric cumulative returns from daily data. Suppose our returns are recorded in variabe rm, then;

    gen Period = .

    bys mon_ser: egen SCAR=sum( ln(rm+1))

    replace SCAR = exp(SCAR) - 1

What if we want the cumulative returns for more than one month. For example, if we want cumulative returns for 36 months, the code would be

     tsset Period

    loc F "(1+SCAR)"

    sum Period

    forval i = 1 / 36 {

        loc F "`F' * (1+L`i'.SCAR)"

        gen rm`=`i'+1'=`F' - 1

    }

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