How do I backfill the price of bonds for backtesting?

Question

I need to backfill the price of bonds for testing a startegy.

The method employed is:

1. Regressing the YTM of the bond against a benchmark.
2. Using the regression estimates to calculate the YTM for the period in which the bond data is not available.
3. Using the "price" function in excel to calculate the bond price with the earliest backfill date as the issue date.

However, using this method, there is a big difference in price at the point where my backfill data begins.

Could somebody please suggest any alternative?

Answer 1

First of all, you should be using OAS, not YTM, as the risk-free interest rate component of YTM is known and should be imposed rather than estimated. Second, rather than regressing OAS against a benchmark, regress changes in OAS against changes in a benchmark OAS. Then calculate a fitted OAS series from the change series, which naturally will not have any jumps where the backfill begins.