Optimizing Portfolio Liquidation Under Risk-Based Margin Requirements

Journal of Finance and Investment Analysis, 2013, Vol 2, No 1, 121-153

27 Pages Posted: 7 Apr 2012 Last revised: 1 Aug 2013

See all articles by Geng Deng

Geng Deng

Wells Fargo

Tim Dulaney

Securities and Exchange Commission

Craig J. McCann

Securities Litigation and Consulting Group

Date Written: December 25, 2012

Abstract

This paper addresses a situation wherein a retail investor must liquidate positions in her portfolio -- consisting of assets and European options on those assets -- to meet a margin call and wishes to do so with the least disruption to her portfolio. We address the problem by first generalizing the usual risk-based haircuts methodology of determining the portfolio margin requirement given the current positions of a portfolio. We derive first and second-order analytic estimates for the margin requirements given the positions. Given this generalization, we determine the liquidation strategy that minimizes the total positions liquidated and meets the margin requirement. We implement the strategy on example portfolios and show advantages over traditional piece-wise liquidation approaches. The analytic approach outlined here is more general than the margin context discussed. Our approach is applicable whenever an investor is attempting to maximize the impact of their capital subject to leverage limits and so has obviously applications to the hedge fund industry.

Keywords: Portfolio Margin, Liquidation

JEL Classification: G11, G00

Suggested Citation

Deng, Geng and Dulaney, Tim and McCann, Craig J., Optimizing Portfolio Liquidation Under Risk-Based Margin Requirements (December 25, 2012). Journal of Finance and Investment Analysis, 2013, Vol 2, No 1, 121-153. Available at SSRN: https://ssrn.com/abstract=2035562 or http://dx.doi.org/10.2139/ssrn.2035562

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Tim Dulaney (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NW
Washington, DC 20549-1105
United States

Craig J. McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

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