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wai fong

National University of Singapore, Finance, Faculty Member

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I was a professor in applied finance at the NUS Business School in Singapore for over 30 years. My expertise is in personal finance, behavioral finance and wealth management. I am the author of two personal finance textbooks and a research monograph, "The Lottery Mindset" (Palgrave-Macmillan 2014). I am now a partner in RCF Capital and an independent researcher.

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Armando Marques-Guedes

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Shabib H . Syed

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Papers by wai fong

The Dynamics of DM/L Exchange Rate Volatility: A SWARCH Analysis

International Journal of Finance Economics, 1998

Volatility Persistence and Switching ARCH in Japanese Stock Returns

Asia Pacific Financial Markets, 1997

Standard ARCH-GARCH models usually impute a high degree of persistence to conditional volatility.... more Standard ARCH-GARCH models usually impute a high degree of persistence to conditional volatility. This persistence may be spurious if the conditional volatility is subject to structural change. This paper applies the Switching ARCH(SWARCH) model of Hamilton and Susmel (1994) to investigate regime shifts and volatility persistence in the Japanese stock market. We find that the SWARCH model provides a better description of the data and implies a much lower degree of volatility persistence than conventional ARCH models.

A nonparametric test of the mixture-of-distributions model

Http Dx Doi Org 10 1088 1469 7688 3 3 304, Aug 19, 2006

Basis variations and regime shifts in the oil futures market

Http Dx Doi Org 10 1080 1351847032000082808, May 17, 2010

The conditional volatility of crude oil futures returns is modelled as a regime switching process... more The conditional volatility of crude oil futures returns is modelled as a regime switching process. The model features transition probabilities that are functions of the basis. Consistent with the theory of storage, in volatile periods, an increase in backwardation is associated with an increase in the likellihood of switching to or remaining in the high-volatility state. Conditional on regimes, GARCH

Stochastic Dominance and the Rationality of the Momentum Effect across Markets

On the Relationship between Interest Rates and Volatility Regimes in Daily Stock Returns

The relationship between stock market volatility and the economy is a recurring theme in empirica... more

Risk Preferences, Investor Sentiment and Lottery Stocks: A Stochastic Dominance Approach

Http Dx Doi Org 10 1080 15427560 2013 759579, 2013

Investor sentiment and the MAX effect

Journal of Banking & Finance, 2014

Bali, Cakici and Whitelaw (2011) uncover a new anomaly (the "MAX effect") related to investors' d... more Bali, Cakici and Whitelaw (2011) uncover a new anomaly (the "MAX effect") related to investors' desire for stocks with lottery-like payoffs. Specifically, stocks with high maximum daily returns (high MAX) over the past month perform poorly relative to stocks with low maximum daily returns (low MAX) over the past month. We show that the MAX effect is strongly dependent on investor sentiment and is mainly due to the poor performance of high MAX stocks rather than high returns of low MAX stocks. Investors' desire to gamble in high MAX stocks is not limited to individual investors but is also present amongst some institutions. Controlling for past sentiment reduces the significance of the MAX effect. Our findings provide a behavioral underpinning to recent "optimal beliefs" theories (Brunnermeier, Gollier and Parker 2007) where investor optimism generates a preference for lottery-type securities

The Stochastic Component of Realized Volatility

Annals of Financial Economics, 2006

Volatility–volume regressions provide a convenient framework to study sources of volatility predi... more Volatility–volume regressions provide a convenient framework to study sources of volatility predictability. We apply this approach to the daily realized volatility of common stocks. We find that unexpected volume plays a more significant role in explaining realized volatility than expected volume, and accounts for about one-third of the non-persistent component in the volatility process. Contrary to the findings of Lamoureux and Lastrapes (1990), the ARCH effect is robust even in the presence of volume. However, this component explains only about half of the variations in realized volatility. Thus, large portion of realized volatility is clearly stochastic. This presents a significant challenge to the goal of achieving precise realized volatility forecasts.

Basis variations and regime shifts in the oil futures market

The European Journal of Finance, 2003

The conditional volatility of crude oil futures returns is modelled as a regime switching process... more

Robust beta estimation: Some empirical evidence

Review of Financial Economics, 1997

The effect of allowing for skewness and excess kurtosis in estimating market model betas is exami... more The effect of allowing for skewness and excess kurtosis in estimating market model betas is examined using the Generalized Student-t (GET) Distribution. The GET generalizes the widely used Student-t distribution by allowing for skewness as well as leptokurtosis. Using data on monthly returns of twenty-two stocks listed on the Singapore Stock Exchange, we find that the GET provides a significantly better fit to the data than the normal distribution or the symmetric Student-t distribution. Based on a small out-of-sample experiment, the GET was also found to outperform OLS and Student-t betas in forecasting ability. Beta coefficients estimated from the Capital Asset Pricing Model (CAPM) are important inputs in portfolio management and financial management. In portfolio management, beta serves as a measure of an asset's volatility relative to a diversified market portfolio. In financial management, betas are used to estimate cost of capital for risky projects. While recent evidence (e.g., Fama and French, 1992) appear to indicate that the explanatory power of beta is supplanted by other firm specific variables like firm size, price-to-book ratio and liquidity, it may be premature to dismiss the CAPM altogether. As Shanken and Smith (1996) point out, the statistical tests used by Fama and French (1992) have rather limited power in discriminating between alternative hypotheses inspite of using long sample periods (see also Kothari, Shanken and Sloan, 1995). Furthermore, instead of abandoning the CAPM framework as Haugen (1996) advocates, the CAPM may be regarded as a base case model in which variables other than beta may be added to increase explanatory and predictive power. While the question of which model best describes asset returns is still being debated, an issue of ongoing concern to practitioners is how to reliably estimate asset betas, given that they have chosen a particular asset pricing model. The

A nonparametric test of the mixture-of-distributions model

Quantitative Finance, 2003

Abstract Intertemporal implications of the mixture-of-distributions hypothesis (MDH) are derived ... more

On the Cost of Adverse Selection in Individual Annuity Markets: Evidence From Singapore

Journal of Risk & Insurance, 2002

A Cardan's discriminant approach to predicting currency crashes

Journal of International Money and Finance, 2007

This paper models large swings in exchange rates by introducing nonlinearity via the generalized ... more This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261e267]. As the distribution allows for bimodality, a switch between modes may give rise to currency crashes. A statistic known as Cardan's discriminant, based on the shape parameters of the GEN, is used to detect bimodality. The Cardan's discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies.

Footprints in the market: Hedge funds and the carry trade

Journal of International Money and Finance, 2013

This paper uses a new database provided by the Commodity and Futures Trading Commissions to exami... more This paper uses a new database provided by the Commodity and Futures Trading Commissions to examine the price impact of hedge fund carry trades in "hot" and "cold" markets. We find that hedge funds significantly increase their carry trade positions during hot markets (periods with very high currency returns). Consistent with currency overpricing, positions in hot markets are followed by exchange rate reversals. Optimism in the stock market seems to have a spillover effect on hedge fund speculation in the currency market: controlling for the variance risk premium fully accounts for the reversal effect. Overall, our results add to a growing body of empirical evidence that institutional demand can move asset prices.

Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

Journal of International Financial Markets, Institutions and Money, 2009

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent... more The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A-and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of Ashares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.

Do expected business conditions explain the value premium?

Journal of Financial Markets, 2012

This study employs a new data set to reexamine the book-to-market effect. In contrast to past stu... more This study employs a new data set to reexamine the book-to-market effect. In contrast to past studies, a direct measure of expected business conditions is used to test whether the value premium is compatible with a risk-based explanation. The measure of expected business conditions is based on the Livingston survey of real GDP growth forecasts, and spans half a century. These forecasts are used to perform a comprehensive set of conditional (time series) and unconditional (cross-sectional) tests of the risk-based hypothesis. None of the tests provide firm evidence that the value premium can be explained by business risk. Evidence against the risk-based explanation is strongest for small firms.

Chasing trends: recursive moving average trading rules and internet stocks

Journal of Empirical Finance, 2005

The recent rise and fall of Internet stock prices has led to popular impressions of a speculative... more

Stochastic dominance and behavior towards risk: The market for Internet stocks

Journal of Economic Behavior & Organization, 2008

Internet stocks registered large gains in the late 1990s, followed by large losses from early 200... more Internet stocks registered large gains in the late 1990s, followed by large losses from early 2000. Using stochastic dominance theory, we infer how investor risk preferences have changed over this cycle, and relate our findings to utility theory and behavioral finance. Our major findings are as follows. First, risk averters and risk seekers show a distinct difference in preference for internet versus "old economy" stocks. This difference is most evident during the bull market period (1998-2000) where internet stocks stochastically dominate old economy stocks for risk seekers but not risk averters. In the bear market, risk averters show an increased preference for old economy stocks, while risk seekers show a reduced preference for Internet stocks. These results are inconsistent with prospect theory and indicate that investors exhibit reverse Sshaped utility functions.

Joint Variance-Ratio Tests of the Martingale Hypothesis for Exchange Rates

Journal of Business & Economic Statistics, 1997

There is considerable interest in whether exchange rates behave like martingales. Liu and He test... more

The Dynamics of DM/L Exchange Rate Volatility: A SWARCH Analysis

International Journal of Finance Economics, 1998

Volatility Persistence and Switching ARCH in Japanese Stock Returns

Asia Pacific Financial Markets, 1997

Standard ARCH-GARCH models usually impute a high degree of persistence to conditional volatility.... more Standard ARCH-GARCH models usually impute a high degree of persistence to conditional volatility. This persistence may be spurious if the conditional volatility is subject to structural change. This paper applies the Switching ARCH(SWARCH) model of Hamilton and Susmel (1994) to investigate regime shifts and volatility persistence in the Japanese stock market. We find that the SWARCH model provides a better description of the data and implies a much lower degree of volatility persistence than conventional ARCH models.

A nonparametric test of the mixture-of-distributions model

Http Dx Doi Org 10 1088 1469 7688 3 3 304, Aug 19, 2006

Basis variations and regime shifts in the oil futures market

Http Dx Doi Org 10 1080 1351847032000082808, May 17, 2010

The conditional volatility of crude oil futures returns is modelled as a regime switching process... more The conditional volatility of crude oil futures returns is modelled as a regime switching process. The model features transition probabilities that are functions of the basis. Consistent with the theory of storage, in volatile periods, an increase in backwardation is associated with an increase in the likellihood of switching to or remaining in the high-volatility state. Conditional on regimes, GARCH

Stochastic Dominance and the Rationality of the Momentum Effect across Markets

On the Relationship between Interest Rates and Volatility Regimes in Daily Stock Returns

The relationship between stock market volatility and the economy is a recurring theme in empirica... more

Risk Preferences, Investor Sentiment and Lottery Stocks: A Stochastic Dominance Approach

Http Dx Doi Org 10 1080 15427560 2013 759579, 2013

Investor sentiment and the MAX effect

Journal of Banking & Finance, 2014

Bali, Cakici and Whitelaw (2011) uncover a new anomaly (the "MAX effect") related to investors' d... more Bali, Cakici and Whitelaw (2011) uncover a new anomaly (the "MAX effect") related to investors' desire for stocks with lottery-like payoffs. Specifically, stocks with high maximum daily returns (high MAX) over the past month perform poorly relative to stocks with low maximum daily returns (low MAX) over the past month. We show that the MAX effect is strongly dependent on investor sentiment and is mainly due to the poor performance of high MAX stocks rather than high returns of low MAX stocks. Investors' desire to gamble in high MAX stocks is not limited to individual investors but is also present amongst some institutions. Controlling for past sentiment reduces the significance of the MAX effect. Our findings provide a behavioral underpinning to recent "optimal beliefs" theories (Brunnermeier, Gollier and Parker 2007) where investor optimism generates a preference for lottery-type securities

The Stochastic Component of Realized Volatility

Annals of Financial Economics, 2006

Volatility–volume regressions provide a convenient framework to study sources of volatility predi... more Volatility–volume regressions provide a convenient framework to study sources of volatility predictability. We apply this approach to the daily realized volatility of common stocks. We find that unexpected volume plays a more significant role in explaining realized volatility than expected volume, and accounts for about one-third of the non-persistent component in the volatility process. Contrary to the findings of Lamoureux and Lastrapes (1990), the ARCH effect is robust even in the presence of volume. However, this component explains only about half of the variations in realized volatility. Thus, large portion of realized volatility is clearly stochastic. This presents a significant challenge to the goal of achieving precise realized volatility forecasts.

Basis variations and regime shifts in the oil futures market

The European Journal of Finance, 2003

The conditional volatility of crude oil futures returns is modelled as a regime switching process... more

Robust beta estimation: Some empirical evidence

Review of Financial Economics, 1997

The effect of allowing for skewness and excess kurtosis in estimating market model betas is exami... more The effect of allowing for skewness and excess kurtosis in estimating market model betas is examined using the Generalized Student-t (GET) Distribution. The GET generalizes the widely used Student-t distribution by allowing for skewness as well as leptokurtosis. Using data on monthly returns of twenty-two stocks listed on the Singapore Stock Exchange, we find that the GET provides a significantly better fit to the data than the normal distribution or the symmetric Student-t distribution. Based on a small out-of-sample experiment, the GET was also found to outperform OLS and Student-t betas in forecasting ability. Beta coefficients estimated from the Capital Asset Pricing Model (CAPM) are important inputs in portfolio management and financial management. In portfolio management, beta serves as a measure of an asset's volatility relative to a diversified market portfolio. In financial management, betas are used to estimate cost of capital for risky projects. While recent evidence (e.g., Fama and French, 1992) appear to indicate that the explanatory power of beta is supplanted by other firm specific variables like firm size, price-to-book ratio and liquidity, it may be premature to dismiss the CAPM altogether. As Shanken and Smith (1996) point out, the statistical tests used by Fama and French (1992) have rather limited power in discriminating between alternative hypotheses inspite of using long sample periods (see also Kothari, Shanken and Sloan, 1995). Furthermore, instead of abandoning the CAPM framework as Haugen (1996) advocates, the CAPM may be regarded as a base case model in which variables other than beta may be added to increase explanatory and predictive power. While the question of which model best describes asset returns is still being debated, an issue of ongoing concern to practitioners is how to reliably estimate asset betas, given that they have chosen a particular asset pricing model. The

A nonparametric test of the mixture-of-distributions model

Quantitative Finance, 2003

Abstract Intertemporal implications of the mixture-of-distributions hypothesis (MDH) are derived ... more

On the Cost of Adverse Selection in Individual Annuity Markets: Evidence From Singapore

Journal of Risk & Insurance, 2002

A Cardan's discriminant approach to predicting currency crashes

Journal of International Money and Finance, 2007

This paper models large swings in exchange rates by introducing nonlinearity via the generalized ... more This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261e267]. As the distribution allows for bimodality, a switch between modes may give rise to currency crashes. A statistic known as Cardan's discriminant, based on the shape parameters of the GEN, is used to detect bimodality. The Cardan's discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies.

Footprints in the market: Hedge funds and the carry trade

Journal of International Money and Finance, 2013

This paper uses a new database provided by the Commodity and Futures Trading Commissions to exami... more This paper uses a new database provided by the Commodity and Futures Trading Commissions to examine the price impact of hedge fund carry trades in "hot" and "cold" markets. We find that hedge funds significantly increase their carry trade positions during hot markets (periods with very high currency returns). Consistent with currency overpricing, positions in hot markets are followed by exchange rate reversals. Optimism in the stock market seems to have a spillover effect on hedge fund speculation in the currency market: controlling for the variance risk premium fully accounts for the reversal effect. Overall, our results add to a growing body of empirical evidence that institutional demand can move asset prices.

Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

Journal of International Financial Markets, Institutions and Money, 2009

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent... more The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A-and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of Ashares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.

Do expected business conditions explain the value premium?

Journal of Financial Markets, 2012

This study employs a new data set to reexamine the book-to-market effect. In contrast to past stu... more This study employs a new data set to reexamine the book-to-market effect. In contrast to past studies, a direct measure of expected business conditions is used to test whether the value premium is compatible with a risk-based explanation. The measure of expected business conditions is based on the Livingston survey of real GDP growth forecasts, and spans half a century. These forecasts are used to perform a comprehensive set of conditional (time series) and unconditional (cross-sectional) tests of the risk-based hypothesis. None of the tests provide firm evidence that the value premium can be explained by business risk. Evidence against the risk-based explanation is strongest for small firms.

Chasing trends: recursive moving average trading rules and internet stocks

Journal of Empirical Finance, 2005

The recent rise and fall of Internet stock prices has led to popular impressions of a speculative... more

Stochastic dominance and behavior towards risk: The market for Internet stocks

Journal of Economic Behavior & Organization, 2008

Internet stocks registered large gains in the late 1990s, followed by large losses from early 200... more Internet stocks registered large gains in the late 1990s, followed by large losses from early 2000. Using stochastic dominance theory, we infer how investor risk preferences have changed over this cycle, and relate our findings to utility theory and behavioral finance. Our major findings are as follows. First, risk averters and risk seekers show a distinct difference in preference for internet versus "old economy" stocks. This difference is most evident during the bull market period (1998-2000) where internet stocks stochastically dominate old economy stocks for risk seekers but not risk averters. In the bear market, risk averters show an increased preference for old economy stocks, while risk seekers show a reduced preference for Internet stocks. These results are inconsistent with prospect theory and indicate that investors exhibit reverse Sshaped utility functions.

Joint Variance-Ratio Tests of the Martingale Hypothesis for Exchange Rates

Journal of Business & Economic Statistics, 1997

There is considerable interest in whether exchange rates behave like martingales. Liu and He test... more