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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 Quantum\textsuperscript{TM} 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.

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  • Martin Vesely, 2023. "Finding the Optimal Currency Composition of Foreign Exchange Reserves with a Quantum Computer," Papers 2303.01909, arXiv.org.
    • Handle: RePEc:arx:papers:2303.01909
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    References listed on IDEAS

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    1. Filipe Fontanela & Antoine Jacquier & Mugad Oumgari, 2019. "A Quantum algorithm for linear PDEs arising in Finance," Papers 1912.02753, arXiv.org, revised Feb 2021.
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    4. Martin Vesel'y, 2022. "Application of Quantum Computers in Foreign Exchange Reserves Management," Papers 2203.15716, arXiv.org.
    5. Martin Vesely, 2022. "Application of Quantum Computers in Foreign Exchange Reserves Management," Working Papers 2022/2, Czech National Bank, Research and Statistics Department.
    6. Gili Rosenberg & Poya Haghnegahdar & Phil Goddard & Peter Carr & Kesheng Wu & Marcos L'opez de Prado, 2015. "Solving the Optimal Trading Trajectory Problem Using a Quantum Annealer," Papers 1508.06182, arXiv.org, revised Aug 2016.
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