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著作
預印本 · 2026年4月

A Mathematical Framework for Sequence Risk

摘要

Sequence risk refers to the dependence of terminal wealth on the order in which a fixed set of returns is realized. It is present whenever an investor contributes to or withdraws from a portfolio during the investment horizon and is absent when there are no intermediate cash flows.

This paper derives a second-order approximation for the expected value and variance of terminal wealth under uniform permutations of a fixed return multiset. Both moments reduce to closed-form expressions involving two quantities: the within-multiset variance of returns and a measure of how capital exposure is distributed across time. The ratio of the two moments gives a Sequence Sensitivity Index that summarizes path dependence in a single coefficient of variation and does not require enumerating permutations.

Monte Carlo experiments confirm the approximations in decumulation, accumulation, and zero-cash-flow regimes, and indicate the horizons and dispersion levels at which the second-order truncation loses accuracy.

在 SSRN 閱讀

引用

Ko, Luken, A Mathematical Framework for Sequence Risk (April 20, 2026). Available at SSRN: https://ssrn.com/abstract=6630140

關鍵字

  • sequence risk
  • path dependence
  • terminal wealth
  • compounding
  • cash flows
  • permutation averaging
  • Taylor expansion
  • sensitivity index

JEL 分類

G11 · G17 · G22 · C63