Toward pricing financial derivatives with an IBM quantum computer
Pricing interest-rate financial derivatives is a major problem in finance, in which it is crucial to accurately reproduce the time evolution of interest rates. Several stochastic dynamics have been proposed in the literature to model either the instantaneous interest rate or the instantaneous forwar...
| Main Authors: | , , , , , , , , |
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| Format: | Article |
| Language: | English |
| Published: |
American Physical Society
2021-02-01
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| Series: | Physical Review Research |
| Online Access: | http://doi.org/10.1103/PhysRevResearch.3.013167 |
| _version_ | 1797211054116175872 |
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| author | Ana Martin Bruno Candelas Ángel Rodríguez-Rozas José D. Martín-Guerrero Xi Chen Lucas Lamata Román Orús Enrique Solano Mikel Sanz |
| author_facet | Ana Martin Bruno Candelas Ángel Rodríguez-Rozas José D. Martín-Guerrero Xi Chen Lucas Lamata Román Orús Enrique Solano Mikel Sanz |
| author_sort | Ana Martin |
| collection | DOAJ |
| description | Pricing interest-rate financial derivatives is a major problem in finance, in which it is crucial to accurately reproduce the time evolution of interest rates. Several stochastic dynamics have been proposed in the literature to model either the instantaneous interest rate or the instantaneous forward rate. A successful approach to model the latter is the celebrated Heath-Jarrow-Morton framework, in which its dynamics is entirely specified by volatility factors. In its multifactor version, this model considers several noisy components to capture at best the dynamics of several time-maturing forward rates. However, as no general analytical solution is available, there is a trade-off between the number of noisy factors considered and the computational time to perform a numerical simulation. Here, we employ the quantum principal component analysis to reduce the number of noisy factors required to accurately simulate the time evolution of several time-maturing forward rates. The principal components are experimentally estimated with the five-qubit IBMQX2 quantum computer for 2×2 and 3×3 cross-correlation matrices, which are based on historical data for two and three time-maturing forward rates. This paper is a step towards the design of a general quantum algorithm to fully simulate on quantum computers the Heath-Jarrow-Morton model for pricing interest-rate financial derivatives. It shows indeed that practical applications of quantum computers in finance will be achievable in the near future. |
| first_indexed | 2024-04-24T10:20:23Z |
| format | Article |
| id | doaj.art-506dfce6fff94e368bb9032610587aa1 |
| institution | Directory Open Access Journal |
| issn | 2643-1564 |
| language | English |
| last_indexed | 2024-04-24T10:20:23Z |
| publishDate | 2021-02-01 |
| publisher | American Physical Society |
| record_format | Article |
| series | Physical Review Research |
| spelling | doaj.art-506dfce6fff94e368bb9032610587aa12024-04-12T17:07:36ZengAmerican Physical SocietyPhysical Review Research2643-15642021-02-013101316710.1103/PhysRevResearch.3.013167Toward pricing financial derivatives with an IBM quantum computerAna MartinBruno CandelasÁngel Rodríguez-RozasJosé D. Martín-GuerreroXi ChenLucas LamataRomán OrúsEnrique SolanoMikel SanzPricing interest-rate financial derivatives is a major problem in finance, in which it is crucial to accurately reproduce the time evolution of interest rates. Several stochastic dynamics have been proposed in the literature to model either the instantaneous interest rate or the instantaneous forward rate. A successful approach to model the latter is the celebrated Heath-Jarrow-Morton framework, in which its dynamics is entirely specified by volatility factors. In its multifactor version, this model considers several noisy components to capture at best the dynamics of several time-maturing forward rates. However, as no general analytical solution is available, there is a trade-off between the number of noisy factors considered and the computational time to perform a numerical simulation. Here, we employ the quantum principal component analysis to reduce the number of noisy factors required to accurately simulate the time evolution of several time-maturing forward rates. The principal components are experimentally estimated with the five-qubit IBMQX2 quantum computer for 2×2 and 3×3 cross-correlation matrices, which are based on historical data for two and three time-maturing forward rates. This paper is a step towards the design of a general quantum algorithm to fully simulate on quantum computers the Heath-Jarrow-Morton model for pricing interest-rate financial derivatives. It shows indeed that practical applications of quantum computers in finance will be achievable in the near future.http://doi.org/10.1103/PhysRevResearch.3.013167 |
| spellingShingle | Ana Martin Bruno Candelas Ángel Rodríguez-Rozas José D. Martín-Guerrero Xi Chen Lucas Lamata Román Orús Enrique Solano Mikel Sanz Toward pricing financial derivatives with an IBM quantum computer Physical Review Research |
| title | Toward pricing financial derivatives with an IBM quantum computer |
| title_full | Toward pricing financial derivatives with an IBM quantum computer |
| title_fullStr | Toward pricing financial derivatives with an IBM quantum computer |
| title_full_unstemmed | Toward pricing financial derivatives with an IBM quantum computer |
| title_short | Toward pricing financial derivatives with an IBM quantum computer |
| title_sort | toward pricing financial derivatives with an ibm quantum computer |
| url | http://doi.org/10.1103/PhysRevResearch.3.013167 |
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