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Extrem Value Theorem

This document provides an introduction to extreme value theory (EVT). EVT focuses on modeling extreme and rare events, rather than average behavior. It shows that block maximum values and exceedances over high thresholds follow generalized extreme value and generalized Pareto distributions respectively. These distributions have three types (Gumbel, Frechet, Weibull) depending on the shape parameter. The parameters can be estimated using maximum likelihood. EVT has applications in fields like hydrology, meteorology, and finance to model risks from extreme events.

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128 views25 pages

Extrem Value Theorem

This document provides an introduction to extreme value theory (EVT). EVT focuses on modeling extreme and rare events, rather than average behavior. It shows that block maximum values and exceedances over high thresholds follow generalized extreme value and generalized Pareto distributions respectively. These distributions have three types (Gumbel, Frechet, Weibull) depending on the shape parameter. The parameters can be estimated using maximum likelihood. EVT has applications in fields like hydrology, meteorology, and finance to model risks from extreme events.

Uploaded by

genmik
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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An Introduction to Extreme Value Theory

Petra Friederichs

Meteorological Institute
University of Bonn

COPS Summer School, July/August, 2007


Applications of EVT

Finance
distribution of income has so called fat tails

value-at-risk: maximal daily lost

re-assurance

Hydrology
protection against flood

Q100: maximal flow that is expected once every 100 years

Meteorology
extreme winds

risk assessment (e.g. ICE, power plants)

heavy precipitation events

heat waves, hurricanes, droughts

extremes in a changing climate


Application

In classical statistics:
focus on AVERAGE behavior
of stochastic process

central limit theorem

In extreme value theory:


focus on extreme and rare
events

Fisher-Tippett theorem

What is an extreme?

from Ulrike Schneider


Extreme Value Theory

Block Maximum

M n=max {X 1 , , X n }
for n
M n follows a Generalized Extreme Value (GEV) distribution
Peak over Threshold (POT)

{ X i uX i u}
very large threshold u
follow a Generalized Pareto Distribution (GPD)

Poisson-Point GPD Process


combines POT with Poisson point process
Extreme Value Theory

Block Maximum M n =max {X 1 , , X n }


Example: station precipitation (DWD) at Dresden
1948 2004: 57 seasonal (Nov-March and May-Sept)
(maxima over approximately 150 days)

Summer
Dresden

Winter
GEV Fisher-Tippett Theorem

The distribution of M n =max {X 1 , , X n }


converges to ( n )
1 /
y
0 G y=exp [1 ]

y
=0 G y=exp exp

which is called the Generalized Extreme Value (GEV) distribution.
It has three parameters

location parameter
scale parameter
shape parameter
GEV Types of Distributions

y
GEV has 3 types depending on shape parameter x=

Gumbel =0
G x =expexp[x ]

Frchet =1/0

x
G x =exp[1 ]

Weibull =1/0
x
G x =exp[1 ]

GEV Types of Distributions

y
GEV has 3 types depending on shape parameter x=

Gumbel =0
exponential tail

Frchet =1/0
so called fat tail

Weibull =1/0
upper finite endpoint
GEV Types of Distribution

Conditions to the sample {X 1 , , X n } from which the maxima are drawn


Xi must be independently identically distributed (i.i.d.)

Let F x be the distribution of X i

F x is in the domain of attraction of a Gumbel type GEV iff


p=0.99
p=0.9 F(x)
1F xtb x t
lim =e
x 1F x

for all t0
Exponential decay in the tail of F x
x0.9 x0.99
GEV Types of Distribution

Conditions to the sample {X 1 , , X n } from which the maxima are drawn


Xi must be independently identically distributed (i.i.d.)

Let F x be the distribution of X i

F x is in the domain of attraction of a Frechet type GEV iff

1 F x 1/
lim =
x 1F x

for all 0
polynomial decay in the tail of F x
GEV Types of Distribution

Conditions to the sample {X 1 , , X n } from which the maxima are drawn


Xi must be independently identically distributed (i.i.d.)

Let F x be the distribution of X i

F x is in the domain of attraction of a Weibull type GEV iff


there exists F with F F =1
and 1
1 1 1/
lim 1F F 1F F =
x x x
for all 0
F x has a finite upper end point F
GEV return level

Of interest often is return level zm


value expected every m observation (block maxima)
1
Prob y z m =1G yz m =
m
calculated using invers distribution function (quantile function)
11
z m = G 1 = 1log 11/m
m
z m = log log 11/ m
can be estimated empirically as the

1 1 1
z m = G 1 = inf y F y
m m
Block Maxima

Maximum daily precipitation for Nov-March (Winter) and May-Sept (Summer)

Summer
Dresden

Winter
Block Maxima
Block Maxima
Peak over Threshold
Peak over Threshold (POT)

{ X i uX i u}
very large threshold u
follow a Generalized Pareto Distribution (GPD)

Daily precipitation for Nov-March (green) and May-Sept (red) Dresden


Peak over Threshold
Peak over Threshold (POT)

The distribution of Y i := X i uX i u
exceedances over large threshold u
are asymptotically distributed following a
Generalized Pareto Distribution (GPD)
1/
y
H yX i u=11
u
two parameters
scale parameter
shape parameter

advantage: more efficient use of data


disadvantage: how to choose threshold not evident
POT Types of Distribution

GDP has same 3 types as GEV depending on shape parameter

Gumbel =0
y
H y =1exp
u
exponential tail

Pareto (Frchet) 0
1H y~c y1/
polynomial tail behavior

Weibull 0
u
has upper end point F =

Peak over Threshold
POT: threshold u = 15mm
Poisson Point GPD Process
Poisson point GPD process with intensity
1/
yu
A=t 2t 1 [1 ] on A=t 1, t 2 y ,
u
Estimation and Uncertainty

General concept of estimating parameters from a sample

{ y i } , i=1, , n
Maximum Likelihood (ML) Method

Assume { y i } are draw from a GEV (GPD,...) with unknown parameters


y i ~F y , ,
and PDF

f y , ,= F ' y , ,
Maximum Likelihood Method

The likelihood L of the sample is then

n
L , ,= i =1 f y i , ,
It is easier to minimize the negative logarithm of the likelihood
n
l , ,=i=1 log f y i , ,

in general there is no analytical solution for the minimum


with respect to the parameters

Minimize using numerical algorithms.

The estimates , , maximize the likelihood of the data.


Profile log Likelihood
To Take Home

There exists a well elaborated statistical theory for extreme


values.
It applies to (almost) all (univariate) extremal problems.
EVT: extremes from a very large domain of stochastic processes
follow one of the three types: Gumbel, Frechet/Pareto, or Weibull

Only those three types characterize the behavior of extremes!


Note: Data need to be in the asymptotic limit of a EVD!
References

Coles, S (2001): An Introduction to Statistical Modeling of Extreme


Values. Springer Series in Statistics. Springer Verlag London. 208p
Beirlant, J; Y. Goegebeur; J. Segers; J. Teugels (2005): Statistics of
Extremes. Theory and Applications. John Wiley & Sons Ltd. 490p
Embrechts, Kppelberg, Mikosch (1997): Modelling Extremal Events for
Insurance and Finance. Springer Verlag Heidelberg.648p
Gumbel, E.J. (1958): Statistics of Extremes. (Dover Publication, New York
2004)

R Development Core Team (2003): R: A language and environment for


statistical computing, available at http://www.R-project.org

The evd and ismev Packages by Alec Stephenson and Stuard Coles

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