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

Martin Vesely

Working Papers from Czech National Bank, Research and Statistics Department

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.

Keywords: Foreign exchange reserves; portfolio optimization; quadratic unconstrained binary optimization; quantum computing (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-cmp, nep-fmk, nep-ifn and nep-mon
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