Extreme value theory as a theoretical background for power law behavior

Simone Alfarano and Thomas Lux ()
Additional contact information
Thomas Lux: University of Kiel

No 2011/02, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

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: Herd Behavior; Speculative dynamics, fat tails, volatility clustering (search for similar items in EconPapers)
JEL-codes: C61 G12 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2011
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 (2010)
Working Paper: Extreme value theory as a theoretical background for power law behavior (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2011/02

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