Bucket (Finance) – Definition

Cite this article as:"Bucket (Finance) – Definition," in The Business Professor, updated February 29, 2020, last accessed October 25, 2020, https://thebusinessprofessor.com/lesson/bucket-finance-definition/.


Bucket (Finance) – Definition

Bucket refers to a term in finance and business that involves grouping of assets into categories. In managerial accounting, the personnel creates cost buckets to help them in tracking unit-level costs. Risk assets received by buckets include equities, risk-free or lower risk assets like short-term and cash securities, and fixed securities with the same maturities.

A Little More on What is a Bucket in Finance

A bucket is a casual term that investors or portfolio managers use to group assets. For instance, a 60/40 portfolio denotes a 60% bucket stocks and 40% bonds. A portfolio with bonds only can be divided into buckets of say five, ten, and thirty-year maturities. On the other hand, a portfolio for equity can have a bucket stocks, bucket growth, and value stocksā€™ bucket.

When it comes to the bucket approach, an investor usually divides his or her portfolio into several buckets. The transfers between those portfolios are usually done carefully thought structure. The first bucket can have enough cash as well as liquid assets. The other bucket has assets that are riskier. The bucket approach shifts an investor away from having only one investment portfolio.

About Bucket Approach

The bucket approach strategy for investing was created by a Nobel Laureate winner known as James Tobin. It involves the allocation of stocks between a risky bucket that produces returns and a safe bucket that meets safety or liquidity needs.

However, to achieve a change in risk level, you need to change the fundsā€™ proportion in the risky bucket relative to the safe bucket. This approach by Tobin has been termed as elegant and simple. However, there are those bucket strategy proponents who recommend the use of up to five buckets.

Why is Bucket Approach Important for Investors?

Investors can use buckets to determine how sensitive a portfolio of swaps is when it comes to changes in interest rates. Once an investor has assessed and is able to determine the risk (market exposure), he or she may decide to hedge the risk, if it happens to be cost-effective. To create a perfect hedge against all bucket exposures, investors can use what we call immunization.

Reference for ā€œBucketā€






Academics research on ā€œBucketā€

[HTML]Ā The government finance database: A common resource for quantitative research in publicĀ financial analysis, Pierson, K., Hand, M. L., & Thompson, F. (2015). The government finance database: A common resource for quantitative research in public financial analysis.Ā PloS one,Ā 10(6), e0130119. Quantitative public financial management research focused on local governments is limited by the absence of a common database for empirical analysis. While the U.S. Census Bureau distributes government finance data that some scholars have utilized, the arduous process of collecting, interpreting, and organizing the data has led its adoption to be prohibitive and inconsistent. In this article we offer a single, coherent resource that contains all of the government financial data from 1967-2012, uses easy to understand natural-language variable names, and will be extended when new data is available.

Delta, gamma andĀ bucketĀ hedging of interest rate derivatives, Jarrow, R. A., & Turnbull, S. M. (1994). Delta, gamma and bucket hedging of interest rate derivatives.Ā Applied Mathematical Finance,Ā 1(1), 21-48. The paper describes a framework for delta and gamma hedging an interest rate portfolio using a multifactor form of the Heath et al. (1992) model. A formal description of bucket hedging is given along with a discussion of some of the issues surrounding the choice of bucket lengths. Given that a small number of factors can describe the evolution of the term structure, the bucket deltas are defined in terms of these factors. The hedging of corporate bonds is also addressed.

The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: A study using contentĀ analysis, Kothari, S. P., Li, X., & Short, J. E. (2009). The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: A study using content analysis.Ā The Accounting Review,Ā 84(5), 1639-1670. We document systematic evidence of risk effects of disclosures culled from a virtually exhaustive set of sources from the print medium. We content analyze more than 100,000 disclosure reports by management, analysts, and news reporters (i.e., business press) in constructing firmā€specific disclosure measures that are quantitative and amenable to replication. We expect credibility and timeliness differences in the disclosures by source, which would translate into differential cost of capital effects. We find that when content analysis indicates favorable disclosures, the firm’s risk, as proxied by the cost of capital, stock return volatility, and analyst forecast dispersion, declines significantly. In contrast, unfavorable disclosures are accompanied by significant increases in risk measures. Analysis of disclosures by sourceā€”corporations, analysts, and the business pressā€”reveals that negative disclosures from business press sources result in increased cost of capital and return volatility, and favorable reports from business press reduce the cost of capital and return volatility.

A study of synchronous andĀ bucketĀ trading behavior of institutional investors, Ko, P. S., Lee, W. C., & Wu, C. C. (2011, May). A study of synchronous and bucket trading behavior of institutional investors. InĀ 2011 IEEE 3rd International Conference on Communication Software and NetworksĀ (pp. 309-312). IEEE. The synchronous or contrarian trading behavior was made differently because the stock market’s investment strategies for institutional investors who may have the same or different anticipation for the future. The purpose of this study is to explore whether the institutional investors were easy to make the synchronous or contrarian trading behavior for the specific periods. There are important empirical findings for the institutional investors. The results imply the institutional investors trading behavior is not consistent in the different period, especially after the crucial crisis happened, at the ending of the year and in the extreme down period of bull market.

Commercial Bank’s Marketing Strategy to Enhance Customer Loyalty on LeakyĀ BucketĀ Theory [J], He-xin, A. N. (2007). Commercial Bank’s Marketing Strategy to Enhance Customer Loyalty on Leaky Bucket Theory [J].Ā Economic Management,Ā 5. Along with the basic completion of the transformation of state-owned joint-stock commercial banks and foreign banks entering the Chinese market,financial markets are emerging Buyer’s market situation.In a buyer’s market situation,the essence of competition among banks is the rivalry for customers,and to win and retain customers has become the key to commercial banks to gain competitive advantages.In this paper,using the theory of marketing,on the basis of the analysis of the effectiveness of the banks from improving customer loyalty,search for the causes leading to loss of customers and the strategy to improve customer loyalty, and try to make contribution to strengthen our commercial banks’ competitive advantages.

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