Case Study of Magic Formula Based on Value Investment in Chinese A-shares Market

Abstract

This paper provides new empirical evidence that the magical formula, put forward by Joel Greenblatt, is effective and applicable in Chinese A-shares market. Referring to other value investing researches and pioneering trading experiences, some new revised strategies based on magical formula are also used to back-test historical returns in Chinese A-shares market, and we compare return of them with that of magical formula, the common value investing strategy and CSI300. Using experimental analysis, we finally find that holding period, capitalization of stocks, selection and weight of financial index can make obvious influences to strategy return. Additionally, the alpha of magical formula is found to exist but small. Our findings highlight the usefulness of value investing in Chinese A-shares market, which has long been regarded as non-standard as well as chaotic, and offer some available options of investment strategy for value investors.