Estimating the Probability of a Rare Event via Elliptical Copulas

Liang Peng

North American Actuarial Journal, 2008, vol. 12, issue 2, 116-128

Abstract: A rare event happens with an extremely small probability but may cost billions of dollars. How to model and estimate the small probability of such an event is of importance to the insurance industry. Based on multivariate extreme value theory, methods have been proposed to extrapolate data into a far tail region. However, questions still remain open, such as the direction of extrapolation for a multivariate distribution and threshold selection for both marginals and the tail dependence function. In this paper we provide a way to estimate the probability of a rare event via modeling marginals and dependence by heavy tailed distributions and elliptical copulas, respectively. Hence, the direction of extrapolation becomes irrelevant. Moreover we employ recent threshold selection procedures to choose tuning parameters automatically.

Date: 2008
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DOI: 10.1080/10920277.2008.10597506

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