Building Continuous Return Series for Rolling Interest Rate Futures

Summary

The document addresses how to calculate returns for an active interest rate futures contract when the underlying contract changes at expiry. It recommends constructing a synthetic adjusted price history, commonly by shifting older contract prices so they align with newer contracts. Returns calculated from that series represent a defined rolling strategy and avoid treating the raw price jump at a roll as an ordinary market move.

The response notes that roll adjustments, often additive, require research and a consistent methodology; market data services may supply ready-made continuous series. It also warns that the return denominator is a modeling choice because futures involve leverage and cash or notional conventions. Notional value alone may be a poor basis for comparisons across contracts, while a measure of delivered risk can be more informative. The answer gives practical guidance but does not prescribe a specific adjustment, return denominator, or risk measure, so results depend on those choices.

Key ideas

• A continuous adjusted price series can represent a strategy that rolls from one futures expiry to the next.
• Back-adjustment aligns older contract prices with the newer contract around expiry changes.
• The roll adjustment method can materially shape the resulting return history.
• Return denominators should account for futures leverage and comparability across contracts.

Tags

# How to calculate returns for interest rate futures


# How to calculate returns for interest rate futures












Say we have the active German government bond future, RXH3 and we wanted to calculate a series of returns for the active contract.

Would we calculate returns on the daily price difference? And if so, what would happen on the roll day? Or would be calculate returns on the Cheapest to Deliver bond?

## Answer by ThatDataGuy (score 3)

https://quant.stackexchange.com/a/75985

The standard approach is to create a synthetic aka adjusted price series. Usually this is done by backwards adjusting prices of older contracts to align with newer ones. This price series then mimics the price of a trading strategy. You can then create a series of returns based on this strategy. Exactly how to do the adjustments (mostly it's just a straight delta plus / minus for each contract expiry roll) is the topic of research, but bloomberg et al can give you pretty decent series directly (eg, "RX1 comdty", etc).

Exactly what the denominator for the returns calc is also kinda up to you, given the leveraged / cash paradigm of futures. Just using the notional is a weak approach though, as it's not easily comparable across contracts. Some measure of delivered risk is better. How you calculate that, is again up to you.

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.