Minimizing the area of a Pareto confidence region

Arturo J. Fernández

European Journal of Operational Research, 2012, vol. 221, issue 1, 205-212

Abstract: A constrained optimization problem is formulated and solved in order to determine the smallest confidence region for the parameters of the Pareto distribution in a proposed family of sets. The objective function is the area of the region, whereas the constraints are related to the required confidence level. Explicit expressions for the area and confidence level of a given region are first deduced. An efficient procedure based on minimizing the corresponding Lagrangian function is then presented to solve the nonlinear programming problem. The process is valid when some of the smallest and largest observations have been discarded or censored, i.e., both single (right or left) and double censoring are allowed. The optimal Pareto confidence region is derived by simultaneously solving three (four) nonlinear equations in the right (double) censoring case. In most practical situations, Newton’s method with the balanced set as the starting point only needs a few iterations to find the global solution. In general, the reduction in area of the optimal Pareto region with respect to the balanced set is considerable if the sample size, n, is small or moderately large, which is usual in practice. This reduction is sometimes impressive when n is quite small and the censoring degree is fairly high. Two numerical examples regarding component lifetimes and fire claims are included for illustrative and comparative purposes.

Keywords: Constrained optimization; Lagrangian method; Nonlinear programming; Pareto distribution; Right and double censoring; Trimmed data (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:221:y:2012:i:1:p:205-212

DOI: 10.1016/j.ejor.2012.03.007

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