Next Article in Journal
Business Distress Prediction Using Bayesian Logistic Model for Indian Firms
Previous Article in Journal
Cryptocurrencies and Exchange Rates: A Relationship and Causality Analysis
Article Menu
Issue 4 (December) cover image

Export Article

Open AccessArticle
Risks 2018, 6(4), 112;

Hedge or Rebalance: Optimal Risk Management with Transaction Costs

Swissquote, Chemin de la Crétaux 33, 1196 Gland, Switzerland
Swiss Finance Institute, Boulevard du Pont-d’Arve 40, 1205 Genéve, Switzerland
Ecole Polytechnique Fédérale de Lausanne, UNIL Dorigny, 1015 Lausanne, Switzerland
Centre for Economic Policy Research, 33 Great Sutton St, Clerkenwell, London EC1V 0DX, UK
Author to whom correspondence should be addressed.
Received: 4 July 2018 / Revised: 24 August 2018 / Accepted: 14 September 2018 / Published: 8 October 2018
Full-Text   |   PDF [509 KB, uploaded 8 October 2018]   |  


We solve the problem of optimal risk management for an investor holding an illiquid, alpha-generating fund and hedging his/her position with a liquid futures contract. When the investor is subject to a lower bound on net return, he/she is forced to reduce the total risk of his/her portfolio after a loss. In this case, he/she faces a tradeoff of either paying the transaction costs and deleveraging or keeping his/her current position in the illiquid instrument and hedging away some of the risk while keeping the residual, unhedgeable risk on his/her balance sheet. We explicitly characterize this tradeoff and study its dependence on asset characteristics. In particular, we show that higher alpha and lower beta typically widen the no-trading zone, while the impact of volatility is ambiguous. View Full-Text
Keywords: optimal portfolio choice; transaction costs; hedging optimal portfolio choice; transaction costs; hedging

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

Share & Cite This Article

MDPI and ACS Style

Gallien, F.; Kassibrakis, S.; Malamud, S. Hedge or Rebalance: Optimal Risk Management with Transaction Costs. Risks 2018, 6, 112.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics



[Return to top]
Risks EISSN 2227-9091 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top