Static Liquidation and Risk Management

Álvaro F. Macías and Jorge P. Zubelli

Chapter 2 in Transactions of ADIA Lab:Interdisciplinary Advances in Data and Computational Science, 2025, pp 53-85 from World Scientific Publishing Co. Pte. Ltd.

Abstract: During the last few years, it has become important to develop strategies to evaluate the necessary collateral to operate large portfolios efficiently. This is particularly important in situations where there is a lot of volatility and markets where new products are being introduced.In this study, we introduce a groundbreaking approach to collateral management that emphasizes measuring haircuts for the entire portfolio. We achieve this by analyzing the liquidation process of portfolios within the context of static strategies, and presenting an innovative methodology for minimizing losses that accounts for both market and liquidity risks. These static strategies are typically employed in high-stress situations, such as fund collapses and liquidations. Our methodology offers an improvement over the classical variance and conditional value at risk (CVaR) models, which can lead to instabilities and exhibit a lack of robustness.We propose an enhanced variance model that addresses market and liquidity risks, manifested as intraday changes and price impacts. Our model concurrently reduces CVaR and the variance associated with intraday fluctuations. This study holds particular interest for risk management professionals at central counterparties and clearing houses, as it assists in calculating margins for portfolio collateral, ensuring greater stability and security.

Keywords: Computational Science; Data Science; AI Applications; Climate Science; Medical Imaging; Sustainability; Interdisciplinary Research; Data Science; Mathematical and Quantitative Finance (search for similar items in EconPapers)
JEL-codes: C45 C63 G11 Q54 (search for similar items in EconPapers)
Date: 2025
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