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Forecasting financial crashes with quantum computing

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  • Roman Orus
  • Samuel Mugel
  • Enrique Lizaso

Abstract

A key problem in financial mathematics is the forecasting of financial crashes: if we perturb asset prices, will financial institutions fail on a massive scale? This was recently shown to be a computationally intractable (NP-hard) problem. Financial crashes are inherently difficult to predict, even for a regulator which has complete information about the financial system. In this paper we show how this problem can be handled by quantum annealers. More specifically, we map the equilibrium condition of a toy-model financial network to the ground-state problem of a spin-1/2 quantum Hamiltonian with 2-body interactions, i.e., a quadratic unconstrained binary optimization (QUBO) problem. The equilibrium market values of institutions after a sudden shock to the network can then be calculated via adiabatic quantum computation and, more generically, by quantum annealers. Our procedure could be implemented on near-term quantum processors, thus providing a potentially more efficient way to assess financial equilibrium and predict financial crashes.

Suggested Citation

  • Roman Orus & Samuel Mugel & Enrique Lizaso, 2018. "Forecasting financial crashes with quantum computing," Papers 1810.07690, arXiv.org, revised Jun 2019.
  • Handle: RePEc:arx:papers:1810.07690
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    Cited by:

    1. Jesús Fernández-Villaverde & Isaiah J. Hull, 2023. "Dynamic Programming on a Quantum Annealer: Solving the RBC Model," NBER Working Papers 31326, National Bureau of Economic Research, Inc.
    2. Samuel Fern'andez-Lorenzo & Diego Porras & Juan Jos'e Garc'ia-Ripoll, 2020. "Hybrid quantum-classical optimization for financial index tracking," Papers 2008.12050, arXiv.org, revised Oct 2021.
    3. Raphael Auer & Angela Dupont & Leonardo Gambacorta & Joon Suk Park & Koji Takahashi & Andras Valko, 2024. "Quantum computing and the financial system: opportunities and risks," BIS Papers, Bank for International Settlements, number 149.
    4. Skavysh, Vladimir & Priazhkina, Sofia & Guala, Diego & Bromley, Thomas R., 2023. "Quantum monte carlo for economics: Stress testing and macroeconomic deep learning," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    5. Dylan Herman & Cody Googin & Xiaoyuan Liu & Alexey Galda & Ilya Safro & Yue Sun & Marco Pistoia & Yuri Alexeev, 2022. "A Survey of Quantum Computing for Finance," Papers 2201.02773, arXiv.org, revised Jun 2022.
    6. Sofia Priazhkina & Samuel Palmer & Pablo Martín-Ramiro & Román Orús & Samuel Mugel & Vladimir Skavysh, 2024. "Digital Payments in Firm Networks: Theory of Adoption and Quantum Algorithm," Staff Working Papers 24-17, Bank of Canada.
    7. Samuel Mugel & Enrique Lizaso & Roman Orus, 2020. "Use Cases of Quantum Optimization for Finance," Papers 2010.01312, arXiv.org.
    8. Vladimir Skavysh & Sofia Priazhkina & Diego Guala & Thomas Bromley, 2022. "Quantum Monte Carlo for Economics: Stress Testing and Macroeconomic Deep Learning," Staff Working Papers 22-29, Bank of Canada.

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