On The Impacts of Tail Model Uncertainty in Rare-Event Estimation

Rare-event probabilities and risk measures that quantify the likelihood of catastrophic or failure events can be sensitive to the accuracy of the underlying input models, especially regarding their tail behaviors. We investigate how the lack of tail information of the input can affect the output extremal measures, in relation to the level of data that are needed to inform the input tail. Using the basic setting of estimating the probability of the overshoot of an aggregation of i.i.d. input variables, we argue that heavy-tailed problems are much more vulnerable to input uncertainty than light-tailed problems. We explain this phenomenon via their large deviations behaviors, and substantiate with some numerical experiments.