Robust and efficient fitting of the generalized Pareto distribution with actuarial applications in view

Vytaras Brazauskas and Andreas Kleefeld

Insurance: Mathematics and Economics, 2009, vol. 45, issue 3, 424-435

Abstract: Due to advances in extreme value theory, the generalized Pareto distribution (GPD) emerged as a natural family for modeling exceedances over a high threshold. Its importance in applications (e.g., insurance, finance, economics, engineering and numerous other fields) can hardly be overstated and is widely documented. However, despite the sound theoretical basis and wide applicability, fitting of this distribution in practice is not a trivial exercise. Traditional methods such as maximum likelihood and method-of-moments are undefined in some regions of the parameter space. Alternative approaches exist but they lack either robustness (e.g., probability-weighted moments) or efficiency (e.g., method-of-medians), or present significant numerical problems (e.g., minimum-divergence procedures). In this article, we propose a computationally tractable method for fitting the GPD, which is applicable for all parameter values and offers competitive trade-offs between robustness and efficiency. The method is based on [`]trimmed moments'. Large-sample properties of the new estimators are provided, and their small-sample behavior under several scenarios of data contamination is investigated through simulations. We also study the effect of our methodology on actuarial applications. In particular, using the new approach, we fit the GPD to the Danish insurance data and apply the fitted model to a few risk measurement and ratemaking exercises.

Keywords: IB30; IM10; IM11; IM41; IM54; Pure; premium; Robust; statistics; Simulations; Trimmed; moments; Value-at-risk (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:45:y:2009:i:3:p:424-435

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