Volatility Timing of Funds under CPF Investment Scheme: A GARCH Model Approach

Abstract

As researches on the volatility-timing performance of Singapore-based funds are rarely available, this thesis examines the volatility-timing ability of funds under CPF Investment Scheme and non-CPF funds. By including the currency risk effect on internationally managed funds, Busse's model (1999) is improved. Modified factor models are applied to capture the response of funds to the market abnormal conditional volatility. The univariate GARCH or EGARCH models with the day of the week effect are used to derive the effective conditional volatility. The SMB and HML factors have to be constructed from stock market data to exclude the contribution of size effect and BE\ME effect. This study reveals volatility timing is one of the factors that contribute to the excess return of funds. However, funds' volatility-timing seems to be country-specific. Moreover, most funds under CPF Investment Scheme do not have a group behavior of better volatility timing except Japan equity funds.