BSc in Actuarial Science AS3015 Extreme Event Statistics 2013-14 Coursework 1

This coursework consists of 3 questions on 4 pages. Maximum 80 marks. Deadline 7th November 2013. 1. Subject of this problem is the Burr distribution, sometimes used to model insurance losses. The Burr distribution, denoted Burr(, , ) is a 3 parameters family of random variables with cdf given by F ( x) = 1 with > 0, > 0, > 0. (a) Check that the Pareto distribution is a special case of the Burr. [1 mark] (b) Show that Burr(, , ) is a scale parameter family. More precisely, prove that if X Burr(, , ) and > 0, then X has again Burr distribution for some parameters , , that you should determine. [5 marks] (c) Show that if X1 , . . . , Xn are iid with Burr(, , ) distribution then mn = min{X1 , . . . , Xn } has again Burr distribution with parameters ( , , ) that you should determine. [5 marks] (d) Compute the density f (x), the quantile F 1 (x) and the hazard rate (x) for the Burr distribution. [5 marks] 1 + x

, x>0

(e) Check that the limit

x+

lim x(x)

is nite and positive, and conclude that the Burr distribution is in the domain of attraction of the Fr echet distribution with shape parameter that you should determine. [4 marks] (f) Show explicitly that the tail of the Burr distribution is a regularly varying function. [5 marks] [Total 25 marks] 2. The le Weibull sample.xls contains a sample of 20 000 observations from a Weibull(, ) distribution, with = 1.1 and = 10. Observations are organized in a 100 200 matrix. Recall that the Weibull(, ) distribution has cdf and pdf given by F (x) = 1 e( ) , f (x) =
x x 1 ( ) . x e

As usual, for a sequence of iid rv X1 , . . . , Xn , . . ., let Mn = max{X1 , . . . , Xn }. Aim of this problem is to evaluate quantiles of the distribution of M100 .
1 (a) Write down expressions for FM100 , the cdf of M100 , and FM using 100 the exact distribution - Weibull - for the Xi s. [5 marks]

(b) Statistician A assumes (wrongly) that the sample comes from an 1 )), exponential distribution Exp() (corresponding to Weibull(1, so he decides to compute the quantities in (a) using an Exp() 1 distribution; write down expressions for FM100 and FM in this 100 case. [2 marks] (c) Statistician B decides to use a Gumbel distribution (with scale and location parameters and ) to approximate directly the distribution of M100 . Write again down expressions for FM100 and 1 FM using the Gumbel distribution. [3 marks] 100 (d) Statistician A estimates the Exp() using the whole sample of 20 000 observations using the maximum likelihood estimator for , 1 = , X where X =
1 n i

Xi and n =20 000. Compute . 2

[1 mark]

(e) Statistician B divides the sample in 200 blocks, each consisting of 100 observations in each column, and compute the maximum of each block. He then ts the Gumbel distribution to this 200 sized sample using the method of moments as follows. i. The following result is given: if Z is a Gumbel distribution with location and scale parameters , , then E [Z ] = + , VAR[Z ] = 2 2 6

where = 0.5772156649 is the so-called Euler constant. Compute the second moment E [Z 2 ]. [2 marks] ii. Use the above expressions to nd method of moments estimators of and , denoted and based on the matching of theoretical moments E [Z ] and E [Z 2 ] with the empirical moments m m 2 (2) j =1 Zj j =1 Zj Z= , Z = m m where m = 200 and Zj is the maximum in block j . [5 marks] iii. Extract the maxima from each column and compute then the values of , . [3 marks] (f) Build up a table (use Excel or your favorite software) containing
1 FM (p), p = 0.90, 0.91, . . . , 0.99, 0.991, . . . , 0.999. 100

Compute the true values using the parameters and and the corresponding values obtained by statisticians A and B using the estimates and , estimated above. Include also the absolute and relative errors (with respect to the true values). Finally compute the average absolute and relative errors made by statisticians A and B and provide some comments on the results. [9 marks] [Total 30 marks] 3. Consider iid random variables X1 , . . . , X n , . . . with cdf F (x) = 1 2 , x 0. 1 + ex

(a) Compute the density f (x), the quantile F 1 (x) and the hazard rate function (x). [3 marks] 3

(b) Show that F belongs to the domain of attraction of the Gumbel distribution by verifying that F (x)f (x) = 1. x+ f 2 ( x) lim [5 marks] (c) Compute the normalizing sequences dn = F 1 1 1 n , cn = 1 . (dn ) [3 marks] (d) Check that the inequality cn x + d n 0 is eventually satised for all x R. (e) Show that F ( cn x + d n ) =
n

[2 marks]
n

rn (x) 1+ n

, [4 marks]

where rn (x) is some number depending on n and x. (f) Show that the limit
n+

lim rn (x) [4 marks]

exists and is nite. (g) Use the following result if zn z then 1 + to identify the limit
n+

zn n

exp(z )

lim F (cn x + dn )n

as a Gumbel distribution with location and scale that you should determine. [4 marks] [Total 25 marks]