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Modelling losses and locating the tail with the Pareto Positive Stable distribution

Abstract: This paper focuses on modelling the severity distribution. We directly model the small, moderate and large losses with the Pareto Positive Stable (PPS) distribution and thus it is not necessary to fix a threshold for the tail behaviour. Estimation with the method of moments is straightforward. Properties, graphical tests and expressions for value-at risk and tail value-at-risk are presented. Furthermore, we show that the PPS distribution can be used to construct a statistical test for the Pareto distribution and to determine the threshold for the Pareto shape if required. An application to loss data is presented. We conclude that the PPS distribution can perform better than commonly used distributions when modelling a single loss distribution for moderate and large losses. This approach avoids the pitfalls of cut-off selection and it is very simple to implement for quantitative risk analysis.

Otras publicaciones de la misma revista o congreso con autores/as de la Universidad de Cantabria

 Autoría: Guillen M., Prieto F., Sarabia J.,

 Fuente: Insurance: Mathematics and Economics , vol. 49, Issue 3, Pages 454 - 461

Editorial: Elsevier

 Fecha de publicación: 01/11/2011

Nº de páginas: 7

Tipo de publicación: Artículo de Revista

 DOI: 10.1016/j.insmatheco.2011.07.004

ISSN: 0167-6687,1873-5959