Hidden tail chains and recurrence equations for dependence parameters associated with extremes of higher-order Markov chains

TL;DR

This paper develops a new asymptotic theory for higher-order Markov chains to understand their extremal behavior, introducing novel functions for dependence and normalization that generalize previous models.

Contribution

It introduces a new framework for analyzing extremal properties of higher-order Markov chains, including non-degenerate limit laws and affine normalization functions.

Findings

Derived non-degenerate limit laws for extremal Markov chains.

Introduced novel dependence functions involving multiple previous states.

Established affine normalization functions with Yule-Walker-like structure.

Abstract

We derive some key extremal features for $k$th order Markov chains that can be used to understand how the process moves between an extreme state and the body of the process. The chains are studied given that there is an exceedance of a threshold, as the threshold tends to the upper endpoint of the distribution. Unlike previous studies with $k>1$, we consider processes where standard limit theory describes each extreme event as a single observation without any information about the transition to and from the body of the distribution. Our work uses different asymptotic theory which results in non-degenerate limit laws for such processes. We study the extremal properties of the initial distribution and the transition probability kernel of the Markov chain under weak assumptions for broad classes of extremal dependence structures that cover both asymptotically dependent and asymptotically independent Markov chains. For chains with $k>1$, the transition of the chain away from the exceedance involves novel functions of the $k$ previous states, in comparison to just the single value, when $k=1$. This leads to an increase in the complexity of determining the form of this class of functions, their properties and the method of their derivation in applications. We find that it is possible to derive an affine normalization, dependent on the threshold excess, such that non-degenerate limiting behaviour of the process is assured for all lags. These normalization functions have an attractive structure that has parallels to the Yule-Walker equations. Furthermore, the limiting process is always linear in the innovations. We illustrate the results with the study of $k$th order stationary Markov chains with exponential margins based on widely studied families of copula dependence structures.