The Magic Formula: Value, Profitability, and the Cross Section of Global Stock Returns

39 Pages Posted: 22 Apr 2017 Last revised: 29 Oct 2017

Date Written: October 4, 2017

Abstract

Buying profitable, undervalued stocks and shorting unprofitable, overvalued stocks yields significant return differentials in North America, Europe, Japan, and Asia. Using data from 1991-2016, we test Greenblatt’s (2006) “Magic Formula” (MF) and find that a modified MF which uses gross profits as a measure of profitability yields significant abnormal returns for all size groups and in all regions. Results from double sorts and Fama-MacBeth regressions show that MF explains the cross-section of returns in addition to size, book-to-market and momentum.

Keywords: return predictability, profitability, value, magic formula, cross-section of returns

JEL Classification: F21, F30, G10, G11, G12, G15

Suggested Citation

Blackburn, Douglas W. and Cakici, Nusret, The Magic Formula: Value, Profitability, and the Cross Section of Global Stock Returns (October 4, 2017). Available at SSRN: https://ssrn.com/abstract=2956448 or http://dx.doi.org/10.2139/ssrn.2956448

Douglas W. Blackburn (Contact Author)

JP Morgan Chase ( email )

New York, NY
United States

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,887
Abstract Views
6,521
rank
10,676
PlumX Metrics