Document Type

Conference Proceeding


Modelling and Simulation Society of Australia and New Zealand


Faculty of Business and Law


School of Business/Finance, Economics, Markets and Accounting Research Centre




This article was originally published as: Shen, X., Tsui, A., & Zhang, Z. (2013). Modelling the volatility-timing of funds under CPF investment theme. Proceedings of International Congress on Modelling and Simulation (pp. 1371-1377). Adelaide, South Australia. Modelling and Simulation Society of Australia and New Zealand. Original article available here


The performance measure of funds has been an important topic in the past few decades. In recent years the conditional models on return and volatility have become popular in studying the funds’ performance measure, but most of these studies focus on the US funds and a few on the Asian-based funds. The purpose of this study is to examine the volatility-timing performance of Singapore-based funds under the CPF (Central Provident Fund) Investment Scheme and non-CPF linked funds by taking into account of the currency risk effect on internationally managed funds. The CPF investment scheme was introduced in 1986 by the Singapore government in order to enhance CPF members’ funds for retirement. CPF members usually withdraw money for house purchase, while male and high income earners involve in more risky investment with their CPF saving. The CPF board sets up strict admission criteria for investment products, especially for funds which tend to enter the CPF investment scheme. Fund management companies with intention to enter the CPF Investment must have at least S$500 million fund managed in Singapore with minimum three fund managers. One of fund managers must have at least 5 year experience in fund management. Moreover, foreign funds recognized by the Monetary Authority of Singapore (MAS) are allowed to apply for the inclusion of CPF investment scheme, provided that they are a member of the Investment Management Association of Singapore and also have to submit a representative agreement of foreign funds or their mangers. There are 28 fund management companies under the current CPF investment scheme. Since 1 February 2006, the revised benchmark requires new-entry funds to be above the top 25% among their global peers. Compared with the existing funds within the risk level under CPF Investment Scheme, new funds are also required to have lower-than-median expense ratio. A good historical performance for at least 3 years is desirable. In addition, sales charges for fund under CPF Investment Scheme must be less than 3% from 1 Jul 2007. Given the strict entry criteria, it is an interesting question to ask if the CPF funds are “safer and better performed funds” as people expected. In this study we empirically assess whether the funds under CPF Investment Scheme outperform non-CPF funds by examining the volatility-timing performance associated with these funds. The volatility-timing ability of CPF funds will provide CPF board with a new method for risk classification. In particular, we employ the GARCH models and modified factor models to capture the response of funds to the market abnormal conditional volatility including the week day effect. The SMB and HML factors for non-US based funds are constructed from stock market data to exclude the contribution of size effect and BE\ME effect. The results show that volatility timing is one of the factors contributing to the excess return of funds. However, the funds’ volatility-timing seems to be country-specific. Most of the Japanese equity funds and global equity funds under CPF investment scheme are found to have the ability of volatility timing. This finding contrasts with the existing studies on Asian ex-Japan funds and Greater China funds. Moreover, there is no evidence that funds under CPF Investment Scheme show a better group performance of volatility timing.