UQ researchers on a shoestring budget have cracked a complicated computational model for calculating bond interest rates, leaving the world's best mathematical brains gob-smacked.

What began as a hobby for UQ School of Economics PhD student Stuart McDonald and lecturer Rodney Beard has ended up turning the computational finance world on its head.

Mr McDonald and Mr Beard have developed a simple, 'one-model-fits-all' system for determining bond yields over time, a model of great value to the worldwide banking and broking industries.

'The main advantage is that other bond-pricing models must be repeated for each situation. You solve it, you do it again. This model can be applied to all cases and will save a massive amount of time for industry, especially the so-called 'back-room bankers?,' Mr Beard said.

While the theory underpinning the model was already published by another research group in the journal Econometrical several years ago, no-one had been able to devise a working model for its application to commerce until the UQ pair's breakthrough.

Using an ordinary Excel spreadsheet computer system in place of the supercomputer thought to be the only way of developing such a model, Mr McDonald and Mr Beard spent several months working on the problem. 'Finally, one Sunday afternoon I rolled up at Rod's office and said 'I'm stuck'. He just sat down at the computer, tried a slightly different approach, and we had it,' Mr McDonald said. 'Our results show you can do research "on the cheap" and still come up with the goods,' Mr Beard said.

'I think part of the breakthrough was working with a basic program such as an Excel spreadsheet. I was forced to concentrate solely on the problem rather than worrying about mastering complex computer equipment,' Mr McDonald said.

He recently won best student paper in the computational finance section for the work with his US$1000 prize presented to him at the Society for Computational Economics conference held in Provence, France, in June this year. The team's paper has also been submitted to the prestigious Journal of Economic Dynamics and Control.

Mr Beard said a small UQ internal grant had enabled the pair to extend their work which had since been transferred to far more sophisticated Matlab software. 'It grew far too big for Excel, finally surpassing the program's memory capacity altogether,' they laughed.

Fun and Games

There's a little-known UQ connection to the games theorist and mathematician John Forbes Nash Jr., portrayed in the recent Oscar drawcard, A Beautiful Mind. Rodney Beard (see previous story) is a games theorist, the profession portrayed by actor Russell Crowe in the Oscar-winning movie.

Games theorists express human behaviour in mathematical equations, using these to work out the pros and cons influencing decision-making in particular situations.

It is not well-known that another UQ games theorist, the late Professor John Harsanyi, shared the Nobel Prize with Nash. Mathematician Nash shared the Nobel Prize with Professor Harsanyi and Reinhard Selten. The trio were awarded the prize for their contribution to games theory.

Hungarian refugee Professor Harsanyi was appointed lecturer in economics at UQ in 1954 but left in 1956 after being awarded a Rockefeller Fellowship to Stanford University, where he received his PhD in economics. He subsequently worked at the University of California and researched games theory, which emanates from studies of games such as chess or poker.

In these games, players think ahead and devise strategies based on expected counter-moves from other players. Such strategic interaction also characterises many economic situations, and games theory has therefore proved useful in economic analysis. A short autobiography of Professor Harsanyi is published on the Web at:
www.nobel.se/economics/laureates/1994/harsanyi-autobio.html and also in Nobel Laureates 1901-2000 (Polo Publishing of London) by Alan Symons.

UQ's more widely known Nobel Prize win is that of Professor Peter Doherty, Nobel Laureate for Medicine in 1996.

Research team

Rodney Beard (School of Economics, St Lucia and UQ Ipswich) www.uq.edu.au/uqresearchers/researcher/beardrm.html
Stuart McDonald (PhD student, School of Economics) www.uq.edu.au/uqresearchers/researcher/mcdonalds1.html
Dr Ken Lindsay (University of Glasgow)

Funding
Unfunded

Email
r.beard@economics.uq.edu.au

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