Asymptotic theory for Bayesian inference and prediction: from the ordinary to a conditional Peaks-Over-Threshold method

TL;DR

This paper develops the asymptotic theory for Bayesian inference and prediction in the Peaks Over Threshold method, extending it to conditional models and demonstrating its effectiveness through simulations and financial crisis analysis.

Contribution

It provides the first comprehensive asymptotic theory for Bayesian POT inference and prediction, including conditional models with covariates, and establishes Wasserstein consistency.

Findings

Bayesian POT methods are consistent and asymptotically normal.

Posterior predictive distribution accurately estimates extreme event probabilities.

Method effectively analyzes changes in financial crisis frequency.

Abstract

The Peaks Over Threshold (POT) method is the most popular statistical method for the analysis of univariate extremes. Even though there is a rich applied literature on Bayesian inference for the POT, the asymptotic theory for such proposals is missing. Even more importantly, the ambitious and challenging problem of predicting future extreme events according to a proper predictive statistical approach has received no attention to date. In this paper we fill this gap by developing the asymptotic theory of posterior distributions (consistency, contraction rates, asymptotic normality and asymptotic coverage of credible intervals) and prediction within the Bayesian framework in the POT context. We extend this asymptotic theory to account for cases where the focus is on the tail properties of the conditional distribution of a response variable given a vector of random covariates. To enable accurate predictions of extreme events more severe than those previously observed, we derive the posterior predictive distribution as an estimator of the conditional distribution of an out-of-sample random variable, given that it exceeds a sufficiently high threshold. We establish Wasserstein consistency of the posterior predictive distribution under both the unconditional and covariate-conditional approaches and derive its contraction rates. Simulations show the good performances of the proposed Bayesian inferential methods. The analysis of the change in the frequency of financial crises over time shows the utility of our methodology.