Backtesting trading strategies on the Oslo Stock Exchange : Can a non-professional investor beat the market with financial ratios?

Abstract

This thesis analyzes if a non-professional investor can outperform the market with trading strategies based on easy-accessible financial information from companies on the Oslo Stock Exchange. To answer this question, we backtest strategies from 2001 to 2021 with a monthly rebalancing frequency through three weightings: equal, market capitalization, and revenue. We evaluate each strategy through risk-adjusted measures, sector exposures, and risk-factor regressions. All strategies include a two-percent transaction cost to make the backtests realistic. Our results show that several strategies outperform the OSEBX. Strategies based on EBITDA margin, debt-to-equity ratio, current ratio, and interest coverage ratio outperform the market in both absolute and risk-adjusted returns. Furthermore, we find an optimal multiple-metric strategy, in which we combine the EBITDA margin, net profit margin, and current ratio. The multiple-metric strategy outperforms all other strategies tested. Additionally, it outperforms the OSEBX by 7.5 percentage points in average annual return and delivers a 54 percent higher Sharpe ratio throughout the 20 years. The results imply that trading strategies based on specific financial ratios are as relevant for the future, as for the past.