A Distributionally Robust Optimization Framework for Extreme Event Estimation

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Authors: Yuanlu Bai, Henry Lam, Xinyu Zhang
Cited by: 0
References: 39

Abstract

Conventional methods for extreme event estimation rely on well-chosen parametric models asymptotically justified from extreme value theory (EVT). These methods, while powerful and theoretically grounded, could however encounter a difficult bias-variance tradeoff that exacerbates especially when data size is too small, deteriorating the reliability of the tail estimation. In this paper, we study a framework based on the recently surging literature of distributionally robust optimization. This approach can be viewed as a nonparametric alternative to conventional EVT, by imposing general shape belief on the tail instead of parametric assumption and using worst-case optimization as a resolution to handle the nonparametric uncertainty. We explain how this approach bypasses the bias-variance tradeoff in EVT. On the other hand, we face a conservativeness-variance tradeoff which we describe how to tackle. We also demonstrate computational tools for the involved optimization problems and compare our performance with conventional EVT across a range of numerical examples.

Fields of Study & Subjects

Insurance Mortality Demography Risk Management Market Dynamics and Volatility Financial Risk and Volatility Modeling

Publication details

Journal / source
Journal of the American Statistical Association
Publisher
Informa UK Limited
Pages
1–115
Publication date
8 September 2026
Language
EN