Decoding Systematic Relative Investing: A Pairs Approach

32 Pages Posted: 2 Oct 2020 Last revised: 11 Dec 2020

See all articles by Christian L. Goulding

Christian L. Goulding

Research Affiliates, LLC

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Alex J. Pickard

Research Affiliates, LLC

Date Written: December 10, 2020

Abstract

We propose a novel theory that brings to light three fundamental performance drivers of zero-cost systematic investment strategies:

(1) high (positive) own-asset signal-return predictability;

(2) low (or negative) cross-asset signal correlation; and

(3) low (or negative) cross-asset signal-return predictability.

We develop these insights in the context of long-short pair strategies used as portfolio building blocks. We test our approach empirically using momentum signals for major asset classes, though our method can generalize to any signal. Our investable pairs-based portfolio harvests over double the average returns of a conventional rank-based portfolio over the last 20 years.

Keywords: cross-sectional strategies, trading strategies, long-short strategies, relative value, momentum, portfolio construction, alpha, outperformance, anomalies, market timing, asset pricing, zero-cost portfolios, pair trades

JEL Classification: G12, G13

Suggested Citation

Goulding, Christian L. and Harvey, Campbell R. and Pickard, Alex, Decoding Systematic Relative Investing: A Pairs Approach (December 10, 2020). Available at SSRN: https://ssrn.com/abstract=3680314 or http://dx.doi.org/10.2139/ssrn.3680314

Christian L. Goulding

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alex Pickard

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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