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Corrected phase-type approximations of heavy-tailed risk models using perturbation analysis
Authors:E Vatamidou  IJBF Adan  M Vlasiou  B Zwart
Institution:1. Eurandom and Department of Mathematics & Computer Science, Eindhoven University of Technology, P.O. Box 513, 5600 MB Eindhoven, The Netherlands;2. Centrum Wiskunde & Informatica (CWI), P.O. Box 94079, 1090 GB Amsterdam, The Netherlands;3. Department of Mechanical Engineering, Eindhoven University of Technology, P.O. Box 513, 5600 MB Eindhoven, The Netherlands
Abstract:Numerical evaluation of performance measures in heavy-tailed risk models is an important and challenging problem. In this paper, we construct very accurate approximations of such performance measures that provide small absolute and relative errors. Motivated by statistical analysis, we assume that the claim sizes are a mixture of a phase-type and a heavy-tailed distribution and with the aid of perturbation analysis we derive a series expansion for the performance measure under consideration. Our proposed approximations consist of the first two terms of this series expansion, where the first term is a phase-type approximation of our measure. We refer to our approximations collectively as corrected phase-type approximations. We show that the corrected phase-type approximations exhibit a nice behavior both in finite and infinite time horizon, and we check their accuracy through numerical experiments.
Keywords:Ruin probability  Heavy-tailed claim sizes  Error bounds  Tail asymptotics  Relative errors  Value at risk
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