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Behavioral Bias Benefits: Beating Benchmarks By Bundling Bouncy Baskets

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 Added by Ravi Kashyap
 Publication date 2021
  fields Financial
and research's language is English
 Authors Ravi Kashyap




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We consider in detail an investment strategy, titled The Bounce Basket, designed for someone to express a bullish view on the market by allowing them to take long positions on securities that would benefit the most from a rally in the markets. We demonstrate the use of quantitative metrics and large amounts of historical data towards decision making goals. This investment concept combines macroeconomic views with characteristics of individual securities to beat the market returns. The central idea of this theme is to identity securities from a regional perspective that are heavily shorted and yet are fundamentally sound with at least a minimum buy rating from a consensus of stock analysts covering the securities. We discuss the components of creating such a strategy including the mechanics of constructing the portfolio. Using simulations, in which securities lending data is modeled as geometric brownian motions, we provide a few flavors of creating a ranking of securities to identity the ones that are heavily shorted. An investment strategy of this kind will be ideal in market scenarios when a downturn happens due to unexpected extreme events and the markets are anticipated to bounce back thereafter. This situation is especially applicable to incidents being observed, and relevant proceedings, during the Coronavirus pandemic in 2020-2021. This strategy is one particular way to overcome a potential behavioral bias related to investing, which we term the rebound effect.



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