Quantum Implementation of Risk Analysis-relevant Copulas

Janusz Milek

Papers from arXiv.org

Abstract: Modern quantitative risk management relies on an adequate modeling of the tail dependence and a possibly accurate quantification of risk measures, like Value at Risk (VaR), at high confidence levels like 1 in 100 or even 1 in 2000. Quantum computing makes such a quantification quadratically more efficient than the Monte Carlo method; see (Woerner and Egger, 2018) and, for a broader perspective, (Or\'us et al., 2018). An important element of the risk analysis toolbox is copula, see (Jouanin et al., 2004) regarding financial applications. However, to the best knowledge of the author, no quantum computing implementation for sampling from a risk modeling-relevant copula in explicit form has been published so far. Our focus here is implementation of simple yet powerful copula models, capable of a satisfactory capturing the joint tail behaviour of the modelled risk factors. This paper deals with a few simple copula families, including Multivariate B11 (MB11) copula family, presented in (Milek, 2014). We will show that this copula family is suitable for the risk aggregation as it is exceptionally able to reproduce tail dependence structures; see (Embrechts et al., 2016) for a relevant benchmark as well as necessary and sufficient conditions regarding the ultimate feasible bivariate tail dependence structures. It turns out that such a discretized copula can be expressed using simple constructs present in the quantum computing: binary fraction expansion format, comonotone/independent random variables, controlled gates, and convex combinations, and is therefore suitable for a quantum computer implementation. This paper presents design behind the quantum implementation circuits, numerical and symbolic simulation results, and experimental validation on IBM quantum computer. The paper proposes also a generic method for quantum implementation of any discretized copula.

Date: 2020-02, Revised 2020-03
New Economics Papers: this item is included in nep-rmg
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