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Approximating Bond Futures Duration with the Cheapest-to-Deliver Bond

Article Quant Q&A · Author: sumit_uk1
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Summary

The document considers how to approximate historical duration for bond futures when exchange records of past deliverable baskets are unavailable. The proposed initial proxy uses the on-the-run bond’s duration and conversion factor, but the response recommends using the cheapest-to-deliver bond instead.

The rationale is that the CTD bond is usually shorter in maturity than the on-the-run issue, so the choice can materially affect the duration estimate. This is a practical suggestion rather than a full reconstruction method: the document supplies no procedure for identifying historical CTD bonds when basket data are missing, and it gives no numerical comparison or validation of the proxy.

Key ideas

  • Historical bond futures duration may need to be approximated when past delivery baskets are unavailable.
  • Using the on-the-run bond’s duration and conversion factor is one suggested proxy.
  • The response recommends the cheapest-to-deliver bond as a better reference.
  • The CTD bond is usually shorter in maturity than the on-the-run bond, affecting the estimate.
  • The discussion does not explain how to recover historical CTD choices or quantify proxy error.

Tags

Fixed incomeFuturesRisk management
Full text
# Proxying historical bond futures duration


# Proxying historical bond futures duration












I am trying to come up with a very simple/approximate way of filling up historical bond futures duration.

The proposal I have is - lets say for Mar 17 FV contract, I pick up the on-the-run for that day, calculate the duration and the CF and approximate the BF duration.

I know this is prone to errors , but can anyone suggest a better approximation? Note that it's impossible to get historical deliverable basket from exchange

Thanks, Sumit

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/37363

A better suggestion is to use the cheapest to deliver bond (CTD) of the deliverable basket rather than the On-the-run. The CTD is usually of shorter maturity than the on-the-run , so it will make a difference.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.