Roll Dates and Discontinuities in On-the-Run CDS Returns
Summary
The discussion explains a common source of discontinuities when building return series for standardized contracts such as IMM swaps or credit default swaps. A fixed-maturity CDS quote can remain stable across a roll date, while its label as an on-the-run tenor changes as time passes. For example, the same calendar maturity moves from one quoted tenor category to a shorter one, while a different maturity becomes the new on-the-run five-year contract. A series that follows the tenor label therefore switches reference contracts at roll dates and can show a jump.
The answer compares this behavior with a continuous futures series that tracks the next-out contract: when the designated contract changes, the series begins representing a different expiry. This distinction matters when interpreting historical performance or constructing backtests, because a tenor-based quote series is not the same as a series holding one fixed maturity. The response identifies the source of the jump but does not prescribe a return adjustment or provide a complete methodology for calculating swap or CDS portfolio returns.
Key ideas
- A fixed-maturity CDS quote and an on-the-run tenor series represent different objects.
- On roll dates, the maturity associated with a standard tenor label changes.
- A time series that switches to the new on-the-run contract can jump even when individual maturity quotes do not.
- The same contract-switching issue appears in futures series that track the next-out expiry.
- Backtests should distinguish contract returns from returns on a changing tenor label.
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# Handling PV changes on roll days when building return time-series # Handling PV changes on roll days when building return time-series I'm new to this kind of matters hence probably this is a stupid question. I would like to build a return time series for backtesting purposes and I was wondering how to handle pv changes when contracts roll, in particular in case of vanilla IMM swaps and vanilla CDSs. In case of a regular 5Y swap, I would roll it every day and with the curves built at day $t$ I would price the swap I sold in $t-1$ as of $t$, and get the PV difference. It is not clear to me if for standardized contracts such a 5Y-IMM swaps or, even more standardized, a 5Y-CDS, this method can still work. If someone more experienced on this could share any feedback it would be deeply appreciated. ## Answer by Dimitri Vulis (score 1) https://quant.stackexchange.com/a/82396 Yes, it can get a bit confusing. The CDS quotes for maturities, say, March 2030, September 2030, March 2031, don't jump. But the meaning of the "on the run" tenors changes on a roll date. E.g., one day, March 2030 is the on the run 4.5 years, September 2030 is on the run 5 years, and March 2031 is on the run 5.5 years. But the next day, March 2030 is now the on the run 4.0 years, September 2030 is on the run 4.5 years, and March 2031 is on the run 5.0 years. (Moreover tenors other than 5Y might be not liquid and stop being quoted soon after roll date.) So, a time series of "on the run 5 year" CDS quotes, will have a jump whenever it begins to refer to a different CDS maturity, i.e. to September 2030 up to the roll date, and to March 2031 afterwards. Exchange traded futures might be a helpful analogy. Suppose you look at a series of "next out" futures quotes. Whenever the "near" one expires, the "next out" one becomes "near", and the following one becomes "next out", so you have a jump because "next out" again refers to a different IMM date.
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