The Magic Formula : An empirical study of Joel Greenblatt's magic formula, backtested on the Oslo Stock Exchange
Abstract
This study analyzes the performance of Joel Greenblatt's magic formula on the Oslo Stock
Exchange from May 2003 to May 2022. The investment strategy involves ranking stocks
based on their earnings yield and return on capital. We employ the four-factor model of
Fama and French (1993) and Carhart (1997) to measure the strategy's alpha. Our results
indicate that the magic formula generates risk-adjusted excess, with a monthly alpha of
0.5% over the sample period, statistically significant at the p < 0.05 level. Additionally, it
outperforms the OSEAX by 8.02 percentage points in compound annual growth rate and
has a Sharpe ratio of 44 decimal points higher. However, when implementing transaction
costs, the alpha is only significant at the p < 0.l level, suggesting that risk-adjusted excess
returns are not achievable in real-world conditions.