Quantum Stochastic Walks for Portfolio Optimization: Theory and Implementation on Financial Networks

Yen Jui Chang, Wei-Ting Wang, Yun-Yuan Wang, Chen-Yu Liu, Kuan-Cheng Chen and Ching-Ray Chang

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Abstract: Financial markets are noisy yet contain a latent graph-theoretic structure that can be exploited for superior risk-adjusted returns. We propose a quantum stochastic walk (QSW) optimizer that embeds assets in a weighted graph: nodes represent securities while edges encode the return-covariance kernel. Portfolio weights are derived from the walk's stationary distribution. Three empirical studies support the approach. (i) For the top 100 S\&P 500 constituents over 2016-2024, six scenario portfolios calibrated on 1- and 2-year windows lift the out-of-sample Sharpe ratio by up to 27\% while cutting annual turnover from 480\% (mean-variance) to 2-90%. (ii) A $5^{4}=625$-point grid search identifies a robust sweet spot, $\alpha,\lambda\lesssim0.5$ and $\omega\in[0.2,0.4]$, that delivers Sharpe $\approx0.97$ at $\le 5\%$ turnover and Herfindahl-Hirschman index $\sim0.01$. (iii) Repeating the full grid on 50 random 100-stock subsets of the S\&P 500 adds 31\,350 back-tests: the best-per-draw QSW beats re-optimised mean-variance on Sharpe in 54\% of cases and always wins on trading efficiency, with median turnover 36\% versus 351\%. Overall, QSW raises the annualized Sharpe ratio by 15\% and cuts turnover by 90\% relative to classical optimisation, all while respecting the UCITS 5/10/40 rule. These results show that hybrid quantum-classical dynamics can uncover non-linear dependencies overlooked by quadratic models and offer a practical, low-cost weighting engine for themed ETFs and other systematic mandates.

Date: 2025-07
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