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Semiparametric Cross Entropy for Rare-Event Simulation

Author

Listed:
  • Zdravko Botev

    (The University of New South Wales, Sydney, Australia)

  • Ad Ridder

    (VU University Amsterdam)

  • Leonardo Rojas-Nandayapa

    (The University of Queensland)

Abstract

The Cross Entropy method is a well-known adaptive importance sampling method for rare-event probability estimation, which requires estimating an optimal importance sampling density within a parametric class. In this article we estimate an optimal importance sampling density within a wider semiparametric class of distributions. We show that this semiparametric version of the Cross Entropy method frequently yields efficient estimators. We illustrate the excellent practical performance of the method with numerical experiments and show that for the problems we consider it typically outperforms alternative schemes by orders of magnitude.

Suggested Citation

  • Zdravko Botev & Ad Ridder & Leonardo Rojas-Nandayapa, 2013. "Semiparametric Cross Entropy for Rare-Event Simulation," Tinbergen Institute Discussion Papers 13-127/III, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130127
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    Keywords

    Light-Tailed; Regularly-Varying; Subexponential; Rare-Event Probability; Cross Entropy method; Markov Chain Monte Carlo;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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