Choosing Comparable Government Bonds as Benchmarks
Summary
The document evaluates a simple nearest-match method for assigning European government bond benchmarks. It compares each bond with government issues using coupon, maturity date, issue date, and volume, scaled so each field has equal weight, then selects the closest candidate. The author reports that this method agrees with Bloomberg's benchmark list for about a quarter of the bonds.
The response explains that equal weighting of these fields does not make them economically equivalent, and that bond characteristics can interact nonlinearly. For example, when otherwise similar bonds differ in maturity, matching by the nearest maturity may be less useful than matching by yield to maturity. The main lesson is to define a representation that reflects the intended comparison before minimizing a distance measure. The brief exchange does not propose a complete alternative or assess other benchmark conventions, so it leaves open which bond features best reproduce Bloomberg's choices.
Key ideas
- A distance score over coupon, maturity, issue date, and volume treats these features as equally meaningful after scaling.
- Bond characteristics can have nonlinear relationships, so equal weighting may not capture economic similarity.
- A maturity-focused comparison may be less relevant than matching yield to maturity for some benchmark tasks.
- Benchmark selection depends on choosing a bond representation suited to the comparison objective.
Tags
Full text
# How to benchmark bonds? # How to benchmark bonds? I am trying to find for each european bond in my database a proper Benchmark to compare them with the Bloomberg benchmarks for bonds. What i have done so far is to extract a list of all government bonds in Europe and calculate a simple linear formula where I compare 4 fields with each goverment bond: ``` - Coupon - Maturity Date - Issue Date - Volume ``` the formula used is: ``` f(bond,govBond) = abs(bondcoupon - govcoupon)*coefCoupon + abs (bondMaturityDate - gov MaturityDate)*coefMaturity + ... Where the coef are used to give the same weight to each field ``` So, to find a proper benchmark, I choose the min value returned by this function (i.e the closest gov bond using these criterias). The results of this approach is approximately a 25% match with Bloomberg list of Benchmark. Is this a "convenient" way to benchmark bonds? I know that those 4 criterias are not sufficient (Maybe use Yield points from a yield curve or tenor, there are a lot of fields to choose) but I have chosen those 4 fields to simplify the computing (database contains at least 10000 bonds). ## Answer by Lucas Morin (score 1) https://quant.stackexchange.com/a/12995 You represent your bond as a vector of 4 equivalently weighted parameter and try to find the optimal representation for the 1-norm. Parameters are not equivalent, more than that they have non linear ties, it is not okay to represent a bond with a set of common parameters. If you have a family of bond with the same Coupon, Issue Date, Volume and different maturity date, the method will return the coupon with the nearest maturity date. But in fact you would probably be more interested to find the bond such that yield to maturity is the same. You would have to find a better representation first.
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