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A Bayesian approach to parameter estimation for kernel density estimation via transformations

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  • Qing Liu
  • David Pitt
  • Xibin Zhang

    ()

  • Xueyuan Wu

Abstract

In this paper, we present a Markov chain Monte Carlo (MCMC) simulation algorithm for estimating parameters in the kernel density estimation of bivariate insurance claim data via transformations. Our data set consists of two types of auto insurance claim costs and exhibit a high-level of skewness in the marginal empirical distributions. Therefore, the kernel density estimator based on original data does not perform well. However, the density of the original data can be estimated through estimating the density of the transformed data using kernels. It is well known that the performance of a kernel density estimator is mainly determined by the bandwidth, and only in a minor way by the kernel choice. In the current literature, there have been some developments in the area of estimating densities based on transformed data, but bandwidth selection depends on pre-determined transformation parameters. Moreover, in the bivariate situation, each dimension is considered separately and the correlation between the two dimensions is largely ignored. We extend the Bayesian sampling algorithm proposed by Zhang, King and Hyndman (2006) and present a Metropolis-Hastings sampling procedure to sample the bandwidth and transformation parameters from their posterior density. Our contribution is to estimate the bandwidths and transformation parameters within a Metropolis-Hastings sampling procedure. Moreover, we demonstrate that the correlation between the two dimensions is well captured through the bivariate density estimator based on transformed data.

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File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2010/wp18-10.pdf
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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 18/10.

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Length: 18 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:msh:ebswps:2010-18

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Related research

Keywords: Bandwidth parameter; kernel density estimator; Markov chain Monte Carlo; Metropolis-Hastings algorithm; power transformation; transformation parameter.;

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Cited by:
  1. David Pitt & Montserrat Guillen & Catalina Bolancé, 2011. "Estimation of Parametric and Nonparametric Models for Univariate Claim Severity Distributions - an approach using R," Working Papers XREAP2011-06, Xarxa de Referència en Economia Aplicada (XREAP), revised Jun 2011.
  2. Catalina Bolance & Montserrat Guillen & David Pitt, 2014. "Non-parametric Models for Univariate Claim Severity Distributions - an approach using R," Working Papers 2014-01, Universitat de Barcelona, UB Riskcenter.

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