Optimizing Portfolio Liquidation Under Risk-Based Margin Requirements

This paper incorporates risk-based margin requirements into portfolio liquidation procedures in a novel fashion. The approach is analytic and, as a result, more efficient than conventional numerical liquidation methods. The margin requirement calculation is a self-contained inner optimization problem and is traditionally solved by choosing the worst scenario amongst a discrete set of scenarios. We address the inner problem by first generalizing the risk-based haircuts calculation into a continuous region and then using a trust region optimization algorithm to derive the closed-form solution. The solution is typically obtained in less than two iterations and our procedure significantly improves the efficiency of the main portfolio liquation problem. Â We implement the algorithm on example portfolios and show advantages over traditional approaches.