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Lookup NU author(s): Dr Cristiano Villa
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
In this paper, we discuss a method to define prior distributions for the threshold of a generalised Pareto distribution, in particular when its applications are directed to heavy-tailed data. We propose to assign prior probabilities to the order statistics of a given set of observations. In other words, we assume that the threshold coincides with one of the data points. We show two ways of defining a prior: by assigning equal mass to each order statistic, that is a uniform prior, and by considering the worth that every order statistic has in representing the true threshold. Both proposed priors represent a scenario of minimal information, and we study their adequacy through simulation exercises and by analysing two applications from insurance and finance.
Author(s): Villa C
Publication type: Article
Publication status: Published
Print publication date: 01/03/2017
Online publication date: 05/08/2016
Acceptance date: 14/07/2016
Date deposited: 20/05/2020
ISSN (print): 1133-0686
ISSN (electronic): 1863-8260
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