Derivative Pricing and Credit Risk in a Regime Switching Economy Using Quantum Amplitude Estimation

Quantum computers are not yet capable of providing computational advantages for practical stochastic diffusion models commonly used by financial analysts. In this paper, we introduce a class of stochastic processes that are both realistic in terms of mimicking financial market risks and more amenable to potential quantum computational advantages. The models we study are based on a regime-switching volatility model driven by a Markov chain with observable states. We investigate algorithms to estimate credit risk and option pricing on a gate-based quantum computer. These models bring us closer to realistic market settings, thus bringing quantum computing closer to the realm of practical applications. We demonstrate the accuracy of the state preparation circuits outlined for each model using the IBM_torino and Honeywell H1 processors.

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Publication Details

Published
2024-09-15
DOI
https://doi.org/10.1109/qce60285.2024.00067
Citations
4
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
2.16
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article

Derivative Pricing and Credit Risk in a Regime Switching Economy Using Quantum Amplitude Estimation

Hamed Mohammadbagherpoor, Éric Ghysels, Jack Morgan
4 citations
Stochastic processes and financial applications
2.16
article

Derivative Pricing and Credit Risk in a Regime Switching Economy Using Quantum Amplitude Estimation

Hamed Mohammadbagherpoor, Éric Ghysels, Jack Morgan
article en
4 citations

Abstract

Quantum computers are not yet capable of providing computational advantages for practical stochastic diffusion models commonly used by financial analysts. In this paper, we introduce a class of stochastic processes that are both realistic in terms of mimicking financial market risks and more amenable to potential quantum computational advantages. The models we study are based on a regime-switching volatility model driven by a Markov chain with observable states. We investigate algorithms to estimate credit risk and option pricing on a gate-based quantum computer. These models bring us closer to realistic market settings, thus bringing quantum computing closer to the realm of practical applications. We demonstrate the accuracy of the state preparation circuits outlined for each model using the IBM_torino and Honeywell H1 processors.

University of North Carolina at Chapel Hill (US), University of North Carolina Health Care (US)
Decent work and economic growth
Openalex Percentile: Top 11%
Stochastic processes and financial applications
2.16
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