Improved algorithms for rare event simulation with heavy tails

The estimation of P(S n >u) by simulation, where S n is the sum of independent, identically distributed random varibles Y 1 ,…,Y n , is of importance in many applications. We propose two simulation estimators based upon the identity P(S n >u)=nP(S n >u, M n =Y n ), where M n =max(Y 1 ,…,Y n ). One estimator uses importance sampling (for Y n only), and the other uses conditional Monte Carlo conditioning upon Y 1 ,…,Y n−1. Properties of the relative error of the estimators are derived and a numerical study given in terms of the M/G/1 queue in which n is replaced by an independent geometric random variable N. The conclusion is that the new estimators compare extremely favorably with previous ones. In particular, the conditional Monte Carlo estimator is the first heavy-tailed example of an estimator with bounded relative error. Further improvements are obtained in the random-N case, by incorporating control variates and stratification techniques into the new estimation procedures.

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