Investment Base Pairs

62 Pages Posted: 1 Apr 2025 Last revised: 25 Mar 2025

See all articles by Christian L. Goulding

Christian L. Goulding

Auburn University - Harbert College of Business

Campbell R. Harvey

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

Date Written: March 25, 2025

Abstract

Modern finance remains constrained by legacy portfolio construction techniques. While the conventional quantile approaches (e.g., long top 30%/short bottom 30%) and linear weighting schemes dominate cross-sectional strategies, we show that these methods discard crucial cross-asset information. We offer a new approach by decomposing common signals such as value, momentum, and carry, into “base pair” portfolios. Each signal-driven long-short position is shaped by five key drivers: own-asset predictability, cross-asset predictability, signal correlation, and signal mean and variance imbalances. Using 1,710 futures pair portfolios spanning equities, bonds, currencies, and commodities formed from common signal types, we show that targeting top pairs can triple average returns at fixed leverage over 20 years: the aggregate "All" portfolio rises from 3.4% to 10.4% annualized. Equity Value climbs from 3.6% to 14.3% and Currency Momentum reverses a -3.0% loss to a 10.3% gain. By harvesting cross-asset information and eliminating "junk" pairs, this approach offers a robust improvement over the status quo across diverse asset classes and time periods. 

Keywords: cross-signal correlation, signal bias, predictability, pairs trading, futures and forwards, signal sorting, investments, portfolio construction, value, momentum, carry, own-asset effects, cross-asset effects

JEL Classification: G10, G11, G12, G15

Suggested Citation

Goulding, Christian L. and Harvey, Campbell R., Investment Base Pairs (March 25, 2025). Available at SSRN: https://ssrn.com/abstract=5193565 or http://dx.doi.org/10.2139/ssrn.5193565

Christian L. Goulding

Auburn University - Harbert College of Business ( email )

Auburn, AL 36849
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

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