2024/11/05 by Conor Murphy, Jonathan A. Tawn, Zak Varty · 5 citations
Economics, Econometrics and Finance · Mathematics · #Financial Risk and Volatility Modeling #Market Dynamics and Volatility #Statistical Methods and Inference
paper · pdf · doi:10.1080/00401706.2024.2421744
Threshold selection is a fundamental problem in any threshold-based extreme value analysis.While models are asymptotically motivated, selecting an appropriate threshold for finite samples is difficult and highly subjective through standard methods.Inference for high quantiles can also be highly sensitive to the choice of threshold.Too low a threshold choice leads to bias in the fit of the extreme value model, while too high a choice leads to unnecessary additional uncertainty in the estimation of model parameters.We develop a novel methodology for automated threshold selection that directly tackles this bias-variance tradeoff.We also develop a method to account for the uncertainty in the threshold estimation and propagate this uncertainty through to high quantile inference.Through a simulation study, we demonstrate the effectiveness of our method for threshold selection and subsequent extreme quantile estimation, relative to the leading existing methods, and show how the method's effectiveness is not sensitive to the tuning parameters.We apply our method to the well-known, troublesome example of the River Nidd dataset.