Generalized Pareto distribution

In statistics, the generalized Pareto distribution

(GPD) is a family of continuous probability
Generalized Pareto distribution
distributions. It is often used to model the tails of Probability density function
another distribution. It is specified by three
parameters: location , scale , and shape .[2][3]
Sometimes it is specified by only scale and
shape[4] and sometimes only by its shape
parameter. Some references give the shape
parameter as .[5]

Definition
The standard cumulative distribution function
(cdf) of the GPD is defined by[6]
GPD distribution functions for and different
values of and
Cumulative distribution function

Parameters
location (real)
scale (real)

shape (real)
Support

PDF
 where

CDF
Mean

Median

Mode
Variance

Skewness

Ex.
kurtosis
Entropy
MGF

CF

Method of
Moments

CVaR (ES)

[1]

bPOE

[1]

where the support is for and for . The corresponding probability

density function (pdf) is

Characterization
The related location-scale family of distributions is obtained by replacing the argument z by and
adjusting the support accordingly.

The cumulative distribution function of ( , , and ) is

where the support of is when , and when .

The probability density function (pdf) of is

again, for when , and when .

The pdf is a solution of the following differential equation:

Special cases
If the shape and location are both zero, the GPD is equivalent to the exponential
distribution.
With shape , the GPD is equivalent to the continuous uniform distribution .[7]
With shape and location , the GPD is equivalent to the Pareto distribution with
scale and shape .
If , , , then [1] (https://www.tandfonline.co
m/doi/abs/10.1080/03610926.2018.1441418). (exGPD stands for the exponentiated
generalized Pareto distribution.)
GPD is similar to the Burr distribution.

Generating generalized Pareto random variables

Generating GPD random variables

If U is uniformly distributed on (0, 1], then

and

Both formulas are obtained by inversion of the cdf.

In Matlab Statistics Toolbox, you can easily use "gprnd" command to generate generalized Pareto random
numbers.

GPD as an Exponential-Gamma Mixture

A GPD random variable can also be expressed as an exponential random variable, with a Gamma
distributed rate parameter.

and

then

Notice however, that since the parameters for the Gamma distribution must be greater than zero, we obtain
the additional restrictions that: must be positive.

Exponentiated generalized Pareto distribution

The exponentiated generalized Pareto distribution (exGPD)

If , , , then
is distributed according to the
exponentiated generalized Pareto
distribution (https://www.tandfonline.com/do
i/abs/10.1080/03610926.2018.1441418),
denoted by , .

The probability density function(pdf) of

, is

The pdf of the (exponentiated generalized

Pareto distribution) for different values and .
where the support is for , and for .

For all , the becomes the location parameter. See the right panel for the pdf when the shape is
positive.

The exGPD has finite moments of all orders for all and .

The moment-generating function of

is

The variance of the as a function of . Note

that the variance only depends on . The red dotted line
represents the variance evaluated at , that is,
.

where and denote the beta function and gamma function, respectively.

The expected value of , depends on the scale and shape parameters, while the
participates through the digamma function:

Note that for a fixed value for the , the plays as the location parameter under the
exponentiated generalized Pareto distribution.
The variance of , depends on the shape parameter only through the polygamma
function of order 1 (also called the trigamma function):

See the right panel for the variance as a function of . Note that .

Note that the roles of the scale parameter and the shape parameter under are
separably interpretable, which may lead to a robust efficient estimation for the than using the
[2] (https://www.tandfonline.com/doi/abs/10.1080/03610926.2018.1441418). The roles
of the two parameters are associated each other under (at least up to the second
central moment); see the formula of variance wherein both parameters are participated.

The Hill's estimator

Assume that are observations (not need to be i.i.d.) from an unknown heavy-
tailed distribution such that its tail distribution is regularly varying with the tail-index (hence, the
corresponding shape parameter is ). To be specific, the tail distribution is described as

It is of a particular interest in the extreme value theory to estimate the shape parameter , especially when
is positive (so called the heavy-tailed distribution).

Let be their conditional excess distribution function. Pickands–Balkema–de Haan theorem (Pickands,
1975; Balkema and de Haan, 1974) states that for a large class of underlying distribution functions , and
large , is well approximated by the generalized Pareto distribution (GPD), which motivated Peak Over
Threshold (POT) methods to estimate : the GPD plays the key role in POT approach.

A renowned estimator using the POT methodology is the Hill's estimator. Technical formulation of the
Hill's estimator is as follows. For , write for the -th largest value of . Then,
with this notation, the Hill's estimator (see page 190 of Reference 5 by Embrechts et al [3] (https://books.g
oogle.com/books?id=o-clBQAAQBAJ&dq=modeeling+extreme+events+for+insurance&pg=PA1)) based
on the upper order statistics is defined as

In practice, the Hill estimator is used as follows. First, calculate the estimator at each integer
, and then plot the ordered pairs . Then, select from the set of Hill
estimators which are roughly constant with respect to : these stable values are regarded as
reasonable estimates for the shape parameter . If are i.i.d., then the Hill's estimator is a
consistent estimator for the shape parameter [4] (https://www.jstor.org/stable/1427870).
Note that the Hill estimator makes a use of the log-transformation for the observations
. (The Pickand's estimator also employed the log-transformation, but in
a slightly different way [5] (https://www.jstor.org/stable/2242785).)

See also
Burr distribution
Pareto distribution
Generalized extreme value distribution
Exponentiated generalized Pareto distribution (https://www.tandfonline.com/doi/abs/10.108
0/03610926.2018.1441418)
Pickands–Balkema–de Haan theorem

References
1. Norton, Matthew; Khokhlov, Valentyn; Uryasev, Stan (2019). "Calculating CVaR and bPOE
for common probability distributions with application to portfolio optimization and density
estimation" (http://uryasev.ams.stonybrook.edu/wp-content/uploads/2019/10/Norton2019_C
VaR_bPOE.pdf) (PDF). Annals of Operations Research. Springer. 299 (1–2): 1281–1315.
arXiv:1811.11301 (https://arxiv.org/abs/1811.11301). doi:10.1007/s10479-019-03373-1 (http
s://doi.org/10.1007%2Fs10479-019-03373-1). S2CID 254231768 (https://api.semanticschola
r.org/CorpusID:254231768). Retrieved 2023-02-27.
2. Coles, Stuart (2001-12-12). An Introduction to Statistical Modeling of Extreme Values (https://
books.google.com/books?id=2nugUEaKqFEC). Springer. p. 75. ISBN 9781852334598.
3. Dargahi-Noubary, G. R. (1989). "On tail estimation: An improved method". Mathematical
Geology. 21 (8): 829–842. doi:10.1007/BF00894450 (https://doi.org/10.1007%2FBF008944
50). S2CID 122710961 (https://api.semanticscholar.org/CorpusID:122710961).
4. Hosking, J. R. M.; Wallis, J. R. (1987). "Parameter and Quantile Estimation for the
Generalized Pareto Distribution". Technometrics. 29 (3): 339–349. doi:10.2307/1269343 (htt
ps://doi.org/10.2307%2F1269343). JSTOR 1269343 (https://www.jstor.org/stable/1269343).
5. Davison, A. C. (1984-09-30). "Modelling Excesses over High Thresholds, with an
Application" (https://books.google.com/books?id=6M03_6rm8-oC&pg=PA462). In de
Oliveira, J. Tiago (ed.). Statistical Extremes and Applications. Kluwer. p. 462.
ISBN 9789027718044.
6. Embrechts, Paul; Klüppelberg, Claudia; Mikosch, Thomas (1997-01-01). Modelling extremal
events for insurance and finance (https://books.google.com/books?id=BXOI2pICfJUC).
p. 162. ISBN 9783540609315.
7. Castillo, Enrique, and Ali S. Hadi. "Fitting the generalized Pareto distribution to data."
Journal of the American Statistical Association 92.440 (1997): 1609-1620.

Further reading
Pickands, James (1975). "Statistical inference using extreme order statistics" (https://doi.org/
10.1214%2Faos%2F1176343003). Annals of Statistics. 3 s: 119–131.
doi:10.1214/aos/1176343003 (https://doi.org/10.1214%2Faos%2F1176343003).
Balkema, A.; De Haan, Laurens (1974). "Residual life time at great age" (https://doi.org/10.1
214%2Faop%2F1176996548). Annals of Probability. 2 (5): 792–804.
doi:10.1214/aop/1176996548 (https://doi.org/10.1214%2Faop%2F1176996548).
 Lee, Seyoon; Kim, J.H.K. (2018). "Exponentiated generalized Pareto distribution:Properties
and applications towards extreme value theory". Communications in Statistics - Theory and
Methods. 48 (8): 1–25. arXiv:1708.01686 (https://arxiv.org/abs/1708.01686).
doi:10.1080/03610926.2018.1441418 (https://doi.org/10.1080%2F03610926.2018.144141
8). S2CID 88514574 (https://api.semanticscholar.org/CorpusID:88514574).
N. L. Johnson; S. Kotz; N. Balakrishnan (1994). Continuous Univariate Distributions Volume
1, second edition. New York: Wiley. ISBN 978-0-471-58495-7. Chapter 20, Section 12:
Generalized Pareto Distributions.
Barry C. Arnold (2011). "Chapter 7: Pareto and Generalized Pareto Distributions" (https://boo
ks.google.com/books?id=fUJZZLj1kbwC&pg=PA119). In Duangkamon Chotikapanich (ed.).
Modeling Distributions and Lorenz Curves. New York: Springer. ISBN 9780387727967.
Arnold, B. C.; Laguna, L. (1977). On generalized Pareto distributions with applications to
income data. Ames, Iowa: Iowa State University, Department of Economics.

External links
Mathworks: Generalized Pareto distribution (http://www.mathworks.com/help/stats/generaliz
ed-pareto-distribution.html)

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