A Dynamic Mixture Model for Unsupervised Tail Estimation without Threshold Selection

Exceedances over high thresholds are often modeled by fitting a generalized Pareto distribution (GPD) on R+. It is difficult to select the threshold, above which the GPD assumption is enough solid and enough data is available for inference. We suggest a new dynamically weighted mixture model, where one term of the mixture is the GPD, and the other is a light-tailed density distribution. The weight function varies on R+ in such a way that for large values the GPD component is predominant and thus takes the role of threshold selection. The full data set is used for inference on the parameters present in the two component distributions and in the weight function. Maximum likelihood provides estimates with approximate standard deviations. Our approach has been successfully applied to simulated data and to the (previously studied) Danish fire loss data set. We compare the new dynamic mixture method to Dupuis' robust thresholding approach in peaks-over-threshold inference. We discuss robustness with respect to the choice of the light-tailed component and the form of the weight function. We present encouraging simulation results that indicate that the new approach can be useful in unsupervised tail estimation, especially in heavy tailed situations and for small percentiles.