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De Gruyter eBooks

4 Quantum machine learning in finance

Kanu Priya Baheti, Purushender Dhiman

Published Jul 22, 2024• 5 citations
Publisher

Abstract

Quantum computing has the potential to revolutionize many industries, including banking. It is expected that by the end of this decade, quantum computers will have surpassed regular computers in processing capabilities, which will have far-reaching consequences for many sectors, including the financial sector. In particular, it is predicted that the financial industry will gain the most in the short, medium, and long term from using quantum computing. The authors of this chapter discuss the potential benefits of combining machine learning with quantum computing for use in financial modeling. Combining quantum computing and machine learning, or quantum machine learning (QML), provides novel approaches to solving difficult economic problems that classical computers are ill-equipped to tackle. The benefits of employing QML for risk management, credit rating, portfolio optimization, option pricing, and uncovering arbitrage opportunities are addressed, as well as an introduction to the principles of quantum computing. It also describes the quantum hardware and software and the potential challenges and ethical problems associated with QML’s use in the financial sector.

DOI
10.1515/9783111342276-004

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Quantum computing has the potential to revolutionize many industries, including banking. It is expected that by the end of this decade, quantum computers will have surpassed regular computers in processing capabilities, which will have far-reaching consequences for many sectors, including the financial sector. In particular, it is predicted that the financial industry will gain the most in the short, medium, and long term from using quantum computing. The authors of this chapter discuss the potential benefits of combining machine learning with quantum computing for use in financial modeling. Combining quantum computing and machine learning, or quantum machine learning (QML), provides novel approaches to solving difficult economic problems that classical computers are ill-equipped to tackle. The benefits of employing QML for risk management, credit rating, portfolio optimization, option pricing, and uncovering arbitrage opportunities are addressed, as well as an introduction to the principles of quantum computing. It also describes the quantum hardware and software and the potential challenges and ethical problems associated with QML’s use in the financial sector.
The synergy between quantum computing and machine learning gives future potential in the financial sector. The unique features such as superposition and entanglement in quantum computing are utilized in Quantum Machine Learning (QML) to solve the challenges that dominate the modern era of finance. The subject of this paper explains the use of Quantum Machine Learning (QML) in finance including risk management, portfolio optimization, market trend forecasting, and fraud detection. In portfolio optimization, the aim is to reduce risk at the same time maximizing return, the quantum-enhanced methodology does it better than the classical method. QML is applied for risk analysis because it efficiently computes values such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR). In finance, improved sentiment analysis, anomaly detection to prevent fraud, and prediction of market trends are enabled with QML algorithms. QML improves credit rating, financial time series forecasting, and derivative pricing with its ability to process large amounts of data.
Machine learning and quantum machine learning (QML) have gained significant importance, as they offer powerful tools for tackling complex computational problems across various domains. This work gives an extensive overview of QML uses in quantitative finance, an important discipline in the financial industry. We examine the connection between quantum computing and machine learning in financial applications, spanning a range of use cases including fraud detection, underwriting, Value at Risk, stock market prediction, portfolio optimization, and option pricing by overviewing the corpus of literature concerning various financial subdomains.
Abstract Machine learning (ML) and quantum machine learning (QML) have gained significant importance, as they offer powerful tools for tackling complex computational problems across various domains. An overview of QML's uses in quantitative finance is presented here. The connection between quantum computing and machine learning in financial applications, spanning a range of use cases including portfolio optimization, market prediction and trading, pricing and risk management is examined. The different applications from the literature review are categorized based on specific use cases, ML approaches, optimization methods, and the types of quantum hardware utilized. To facilitate this examination, we employ a morphological box, which allows us to analyze different combinations of these elements across financial use cases.
Financial sectors are based on credit risk modeling to make decisions on lending and regulatory compliance. Although classical machine learning has been used to increase predictiveness, such models are faced with mounting limitations as complex and high-dimensional financial data is processed. Quantum Machine Learning (QML) is an aspect of quantum computing that has offered a potential resolution to the issues, integrating quantum computing and machine learning to speed up the calculations and extract more insight into the patterns. QML has theoretical benefits in classifying credit risk via Quantum Support Vector Machines, Quantum Neural Networks, and hybrid quantum-classical models, through superposition and entanglement. Initial applications show good performance in portfolio optimization, default forecasting, and simulation of risks with the existing hardware constraints. QML demonstrates specific potential in the context of using non-traditional data sources and finding hidden correlations that could reflect creditworthiness, which may allow inclusion-based lending practices without sacrificing risk assessment. With the development of quantum hardware, the financial services sector will gradually adopt quantum capabilities via realistic hybrid strategies that eventually revolutionize the way credit risk is assessed in the world markets.
Quantum computers are expected to surpass the computational capabilities of classical computers during this decade and have transformative impact on numerous industry sectors, particularly finance. In fact, finance is estimated to be the first industry sector to benefit from quantum computing, not only in the medium and long terms, but even in the short term. This survey paper presents a comprehensive summary of the state of the art of quantum computing for financial applications, with particular emphasis on stochastic modeling, optimization, and machine learning, describing how these solutions, adapted to work on a quantum computer, can potentially help to solve financial problems, such as derivative pricing, risk modeling, portfolio optimization, natural language processing, and fraud detection, more efficiently and accurately. We also discuss the feasibility of these algorithms on near-term quantum computers with various hardware implementations and demonstrate how they relate to a wide range of use cases in finance. We hope this article will not only serve as a reference for academic researchers and industry practitioners but also inspire new ideas for future research.
Quantum computers are expected to surpass the computational capabilities of classical computers during this decade, and achieve disruptive impact on numerous industry sectors, particularly finance. In fact, finance is estimated to be the first industry sector to benefit from Quantum Computing not only in the medium and long terms, but even in the short term. This review paper presents the state of the art of quantum algorithms for financial applications, with particular focus to those use cases that can be solved via Machine Learning.