Bayesian analysis of extreme values in economic indexes and climate data: Simulation and application

07/04/2019
by   Ali Reza Fotouhi, et al.
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Mixed modeling of extreme values and random effects is relatively unexplored topic. Computational difficulties in using the maximum likelihood method for mixed models and the fact that maximum likelihood method uses available data and does not use the prior information motivate us to use Bayesian method. Our simulation studies indicate that random effects modeling produces more reliable estimates when heterogeneity is present. The application of the proposed model to the climate data and return values of some economic indexes reveals the same pattern as the simulation results and confirms the usefulness of mixed modeling of random effects and extremes. As the nature of climate and economic data are massive and there is always a possibility of missing a considerable part of data, saving the information included in past data is useful. Our simulation studies and applications show the benefit of Bayesian method to save the information from the past data into the posterior distributions of the parameters to be used as informative prior distributions to fit the future data. We show that informative prior distributions obtained from the past data help to estimate the return level in Block Maxima method and Value-at-Risk and Expected Shortfall in Peak Over Threshold method with less bias than using uninformative prior distributions.

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