A Cluster Truncated Pareto Distribution and Its Applications

Abstract

The Pareto distribution is a heavy-tailed distribution with many applications in the real world. The tail of the distribution is important, but the threshold of the distribution is difficult to determine in some situations. In this paper we consider two real-world examples with heavy-tailed observations, which leads us to propose a mixture truncated Pareto distribution (MTPD) and study its properties. We construct a cluster truncated Pareto distribution (CTPD) by using a two-point slope technique to estimate the MTPD from a random sample. We apply the MTPD and CTPD to the two examples and compare the proposed method with existing estimation methods. The results of log-log plots and goodness-of-fit tests show that the MTPD and the cluster estimation method produce very good fitting distributions with real-world data.