Extreme Value Theory as a Theoretical Background for Power Law Behavior

Simone Alfarano and Thomas Lux

MPRA Paper from University Library of Munich, Germany

Abstract: Power law behavior has been recognized to be a pervasive feature of many phenomena in natural and social sciences. While immense research efforts have been devoted to the analysis of behavioral mechanisms responsible for the ubiquity of power-law scaling, the strong theoretical foundation of power laws as a very general type of limiting behavior of large realizations of stochastic processes is less well known. In this chapter, we briefly present some of the key results of extreme value theory, which provide a statistical justification for the emergence of power laws as limiting behavior for extreme fluctuations. The remarkable generality of the theory allows to abstract from the details of the system under investigation, and therefore allows its application in many diverse fields. Moreover, this theory offers new powerful techniques for the estimation of the Pareto index, detailed in the second part of this chapter.

Keywords: Extreme Value Theory; Power Laws; Tail index (search for similar items in EconPapers)
JEL-codes: C01 C13 C14 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ecm and nep-hpe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Extreme value theory as a theoretical background for power law behavior (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24718

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