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Finding the Optimal Currency Composition of Foreign Exchange Reserves with a Quantum Computer

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  • Martin Vesely

Abstract

Portfolio optimization is an inseparable part of strategic asset allocation at the Czech National Bank. Quantum computing is a new technology offering algorithms for that problem. The capabilities and limitations of quantum computers with regard to portfolio optimization should therefore be investigated. In this paper, we focus on applications of quantum algorithms to dynamic portfolio optimization based on the Markowitz model. In particular, we compare algorithms for universal gate-based quantum computers (the QAOA, the VQE and Grover adaptive search), single-purpose quantum annealers, the classical exact branch and bound solver and classical heuristic algorithms (simulated annealing and genetic optimization). To run the quantum algorithms we use the IBM QuantumTM gate-based quantum computer. We also employ the quantum annealer offered by D-Wave. We demonstrate portfolio optimization on finding the optimal currency composition of the CNB's FX reserves. A secondary goal of the paper is to provide staff of central banks and other financial market regulators with literature on quantum optimization algorithms, because financial firms are active in finding possible applications of quantum computing.

Suggested Citation

  • Martin Vesely, 2023. "Finding the Optimal Currency Composition of Foreign Exchange Reserves with a Quantum Computer," Working Papers 2023/1, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2023/1
    as

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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2023_01.pdf
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    References listed on IDEAS

    as
    1. Martin Vesel'y, 2022. "Application of Quantum Computers in Foreign Exchange Reserves Management," Papers 2203.15716, arXiv.org.
    2. Alberto Peruzzo & Jarrod McClean & Peter Shadbolt & Man-Hong Yung & Xiao-Qi Zhou & Peter J. Love & Alán Aspuru-Guzik & Jeremy L. O’Brien, 2014. "A variational eigenvalue solver on a photonic quantum processor," Nature Communications, Nature, vol. 5(1), pages 1-7, September.
    3. John D. C. Little & Katta G. Murty & Dura W. Sweeney & Caroline Karel, 1963. "An Algorithm for the Traveling Salesman Problem," Operations Research, INFORMS, vol. 11(6), pages 972-989, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Foreign exchange reserves; portfolio optimization; quadratic unconstrained binary optimization; quantum computing;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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