 Ruin Probabilities for Strategies with Asymmetric RiskKarl Whelan No 20544, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We analyze sequential investment strategies that expose capital to asymmetric payoff structures — scenarios in which losses are small and frequent, while gains are large but rare. This setup generalizes the classical gambler's ruin problem, traditionally framed as a symmetric game, into a framework for modeling repeated financial decisions under uncertainty. Payoff asymmetry is common in domains such as venture capital, tail-risk hedging, and derivative strategies. We consider cases where each investment has positive, zero, or negative expected return, and derive analytic results for ruin probabilities, expected final wealth, and game duration. Our findings show that increasing asymmetry — higher potential rewards but lower success probability — can paradoxically increase the likelihood of ruin in positive-return settings and mitigate it when returns are negative. For zero-return strategies, we establish bounds on ruin probabilities and show that convergence to terminal outcomes is faster when payoffs are skewed. The results have implications for portfolio risk management and capital allocation in repeated-risk environments. JEL-codes: G11 G17 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:20544 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.