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

TL;DR

This paper advocates Bayesian methods for modeling extreme values in economic and climate data, demonstrating improved estimation accuracy and reliability through simulations and real-world applications.

Contribution

It introduces a Bayesian approach to mixed modeling of extremes, incorporating prior information from past data to enhance estimates in economic and climate studies.

Findings

Bayesian methods yield more reliable estimates with heterogeneity.

Incorporating prior data reduces bias in risk measures.

Application confirms the effectiveness of Bayesian mixed models.

Abstract

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.