Journal of Risk

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Fitting the generalized Pareto distribution to commercial fire loss severity: evidence from Taiwan

Wo-Chiang Lee

ABSTRACT

This paper focuses on modeling and estimating tail parameters of loss distributions from Taiwanese commercial fire loss severity. Using extreme value theory, we employ the generalized Pareto distribution (GPD) and compare it with standard parametric modeling based on lognormal, exponential, gamma andWeibull distributions. In an empirical study, we determine the thresholds of the GPD using mean excess plots and Hill plots. Kolmogorov-Smirnov and likelihood ratio goodness-of-fit tests are conducted, and value-at-risk and expected shortfall are calculated. We also construct confidence intervals for the estimates using the bootstrap method.