Doctoral Student Earns Top Prize for Financial Policy Model
Jan. 9, 2013
Research with potential to help countries fine-tune their foreign exchange-rate policies has earned a Naveen Jindal School of Management doctoral student a top prize in a competition sponsored by an international scientific society.
Sandun Perera suggests a new model for nations to strategically enter international markets and manage exchange rates.
Sandun Perera, a PhD candidate and graduate teaching assistant, recently earned second place and a $300 prize from the Financial Services Section of the Institute for Operations Research and the Management Sciences (INFORMS). His research paper describes a new model for nations to determine the optimal times to enter the foreign-exchange market, the best trade approaches and the most advantageous changes to seek in currency exchange rates.
As detailed in “Market-Reaction-Adjusted Optimal Central Bank Intervention Policy in a Foreign Exchange Market,” Perera’s model offers better control of market timing and strategy, which can affect exchange-rate volatility and decrease expenses associated with a country entering the trading fray.
Bottom line, “the model can save money for a nation’s central bank if implemented properly,” Perera said.
One of Perera’s advisors, Jindal School Professor Alain Bensoussan, said Perera’s mathematics background was key to his work’s success.
“It is extremely gratifying to see that the award was given to a work using advanced mathematical techniques to solve an important real-life problem,” Bensoussan said.
Perera earned a doctorate in mathematics before coming to UT Dallas, where he became an operations management scholar studying the optimization of inventory policies, as well as problems in operations management finance, marketing and financial engineering.
He has used both math and finance skills to study the foreign-exchange market for years. His interest intensified after the March 2011 Tohoku earthquake and tsunami. Afterward, Japan’s central bank sought international support for an intervention to weaken the yen to help exports.
In dissecting the internal workings of such actions, Perera discovered a major flaw: Earlier intervention models had failed to consider exchange-market reaction to central-bank interventions.
“There was empirical evidence to support that there are market reactions, but no theoretical models existed to capture the reactions,” he said.
When the market observes and reacts to interventions, Perera’s model gives the intervening country better information about when and how to enter trading. It also gives more control over related costs and the amount of change to seek in the rates.
Aided by Dr. Bensoussan, UT Dallas Professor Suresh Sethi and Florida Atlantic University Associate Professor Hongwei Long — all co-authors of his paper — Perera incorporated market reactions to create an improved intervention model.
The new model has other potential applications. Perera said it can also be used to solve cash-management problems in mutual funds when fund managers take unexpected actions that prompt investor reaction, such as making large deposits or withdrawals.
Perera, who plans to pursue a college teaching career after graduation, said the recent recognition is very gratifying because “INFORMS is like the temple of operations management.”
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