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A Robust Estimation for the Composite Lognormal-Pareto Model

  • Pak, Ro Jin (Department of Applied Statistics, Dankook University)
  • Received : 2013.04.21
  • Accepted : 2013.07.09
  • Published : 2013.07.31

Abstract

Cooray and Ananda (2005) proposed a composite lognormal-Pareto model to analyze loss payment data in the actuarial and insurance industries. Their model is based on a lognormal density up to an unknown threshold value and a two-parameter Pareto density. In this paper, we implement the minimum density power divergence estimation for the composite lognormal-Pareto density. We compare the performances of the minimum density power divergence estimator (MDPDE) and the maximum likelihood estimator (MLE) by simulations and an example. The minimum density power divergence estimator performs reasonably well against various violations in the distribution. The minimum density power divergence estimator better fits small observations and better resists against extraordinary large observations than the maximum likelihood estimator.

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