Kiel Working Papers, Kiel Institute for World Economics
No 1648:
Extreme Value Theory as a Theoretical Background for Power Law Behavior
Simone Alfarano and Thomas Lux
Abstract: Power law behavior has been recognized to be a pervasive
feature of many phenomena in natural and social sciences. While immense
research efforts have been devoted to the analysis of behavioural
mechanisms responsible for the ubiquity of power-law scaling, the strong
theoretical foundation of power laws as a very general type of limiting
behavior of large realizations of stochastic processes is less well known.
In this paper, we briefly present some of the key results of extreme value
theory, which provide a statistical justification for the emergence of
power laws as limiting behavior for extreme fluctuations. The remarkable
generality of the theory allows to abstract from the details of the system
under investigation, and therefore allows its application in many diverse
fields. Moreover, this theory offers new powerful techniques for the
estimation of the Pareto index, detailed in the second part of this
chapter
Keywords: Power law, estimation, tail index; (follow links to similar papers)
JEL-Codes: C16,; C46,; C63; (follow links to similar papers)
10 pages, September 2010
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