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A parsimonious dynamic mixture for heavy-tailed distributions

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  • Bee, Marco

Abstract

Dynamic mixture distributions are convenient models for highly skewed and heavy-tailed data. However, estimation has proved to be challenging and computationally expensive. To address this issue, we develop a more parsimonious model, based on a one-parameter weight function given by the exponential cumulative distribution function. Parameter estimation is carried out via maximum likelihood, approximate maximum likelihood and noisy cross-entropy. Simulation experiments and real-data analyses suggest that approximate maximum likelihood is the best method in terms of RMSE, albeit at a high computational cost. With respect to the version of the dynamic mixture with weight equal to the two-parameter Cauchy cumulative distribution function, the reduced flexibility of the present model is more than compensated by better statistical and computational properties.

Suggested Citation

  • Bee, Marco, 2025. "A parsimonious dynamic mixture for heavy-tailed distributions," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 230(C), pages 193-206.
  • Handle: RePEc:eee:matcom:v:230:y:2025:i:c:p:193-206
    DOI: 10.1016/j.matcom.2024.11.011
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    References listed on IDEAS

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    3. M. Bee & J. Hambuckers & L. Trapin, 2021. "Estimating large losses in insurance analytics and operational risk using the g-and-h distribution," Quantitative Finance, Taylor & Francis Journals, vol. 21(7), pages 1207-1221, July.
    4. Dacorogna, Michel & Debbabi, Nehla & Kratz, Marie, 2023. "Building up cyber resilience by better grasping cyber risk via a new algorithm for modelling heavy-tailed data," European Journal of Operational Research, Elsevier, vol. 311(2), pages 708-729.
    5. Gabaix, Xavier & Ibragimov, Rustam, 2011. "Rank − 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 24-39.
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    9. Marco Bee & Massimo Riccaboni & Stefano Schiavo, 2011. "Pareto versus lognormal: a maximum entropy test," Department of Economics Working Papers 1102, Department of Economics, University of Trento, Italia.
    10. Bee, Marco, 2023. "Unsupervised mixture estimation via approximate maximum likelihood based on the Cramér - von Mises distance," Computational Statistics & Data Analysis, Elsevier, vol. 185(C).
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