A Bayesian Approach for Estimating Extreme Quantiles Under a Semiparametric Mixture Model

Stefano Cabras and María Eugenia Castellanos

ASTIN Bulletin, 2011, vol. 41, issue 1, 87-106

Abstract: In this paper we propose an additive mixture model, where one component is the Generalized Pareto distribution (GPD) that allows us to estimate extreme quantiles. GPD plays an important role in modeling extreme quantiles for the wide class of distributions belonging to the maximum domain of attraction of an extreme value model. One of the main difficulty with this modeling approach is the choice of the threshold u, such that all observations greater than u enter into the likelihood function of the GPD model. Difficulties are due to the fact that GPD parameter estimators are sensible to the choice of u. In this work we estimate u, and other parameters, using suitable priors in a Bayesian approach. In particular, we propose to model all data, extremes and non-extremes, using a semiparametric model for data below u, and the GPD for the exceedances over u. In contrast to the usual estimation techniques for u, in this setup we account for uncertainty on all GPD parameters, including u, via their posterior distributions. A Monte Carlo study shows that posterior credible intervals also have frequentist coverages. We further illustrate the advantages of our approach on two applications from insurance.

Date: 2011
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