The Annals of Applied Statistics

Gamma shape mixtures for heavy-tailed distributions

Sergio Venturini, Francesca Dominici, and Giovanni Parmigiani

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Abstract

An important question in health services research is the estimation of the proportion of medical expenditures that exceed a given threshold. Typically, medical expenditures present highly skewed, heavy tailed distributions, for which (a) simple variable transformations are insufficient to achieve a tractable low-dimensional parametric form and (b) nonparametric methods are not efficient in estimating exceedance probabilities for large thresholds. Motivated by this context, in this paper we propose a general Bayesian approach for the estimation of tail probabilities of heavy-tailed distributions, based on a mixture of gamma distributions in which the mixing occurs over the shape parameter. This family provides a flexible and novel approach for modeling heavy-tailed distributions, it is computationally efficient, and it only requires to specify a prior distribution for a single parameter. By carrying out simulation studies, we compare our approach with commonly used methods, such as the log-normal model and nonparametric alternatives. We found that the mixture-gamma model significantly improves predictive performance in estimating tail probabilities, compared to these alternatives. We also applied our method to the Medical Current Beneficiary Survey (MCBS), for which we estimate the probability of exceeding a given hospitalization cost for smoking attributable diseases. We have implemented the method in the open source GSM package, available from the Comprehensive R Archive Network.

Article information

Source
Ann. Appl. Stat. Volume 2, Number 2 (2008), 756-776.

Dates
First available in Project Euclid: 3 July 2008

Permanent link to this document
http://projecteuclid.org/euclid.aoas/1215118537

Digital Object Identifier
doi:10.1214/07-AOAS156

Zentralblatt MATH identifier
05591297

Mathematical Reviews number (MathSciNet)
MR2524355

Citation

Venturini, Sergio; Dominici, Francesca; Parmigiani, Giovanni. Gamma shape mixtures for heavy-tailed distributions. Ann. Appl. Stat. 2 (2008), no. 2, 756--776. doi:10.1214/07-AOAS156. http://projecteuclid.org/euclid.aoas/1215118537.


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