Astin Bulletin 41(1), 87-106. doi: 10.2143/AST.41.1.2084387 © 2011 by Astin Bulletin. All rights reserved. A BAYESIAN APPROACH FOR ESTIMATING EXTREME QUANTILES UNDER A SEMIPARAMETRIC MIXTURE MODEL BY STEFANO CABRAS AND MARÍA EUGENIA CASTELLANOS ABSTRACT In this paper we propose an additive mixture model, where one component is the Generalized Pareto distribution (GPD) that allows us to estimate extreme quantiles. GPD plays an important role in modeling extreme quantiles for the wide class of distributions belonging to the maximum domain of attraction of an extreme value model. One of the main diffculty with this modeling approach is the choice of the threshold u, such that all observations greater than u enter into the likelihood function of the GPD model. Diffculties are due to the fact that GPD parameter estimators are sensible to the choice of u. In this work we estimate u, and other parameters, using suitable priors in a Bayesian approach. In particular, we propose to model all data, extremes and non-extremes, using a semiparametric model for data below u, and the GPD for the exceedances over u. In contrast to the usual estimation techniques for u, in this setup we account for uncertainty on all GPD parameters, including u, via their posterior distributions. A Monte Carlo study shows that posterior cred- ible intervals also have frequentist coverages. We further illustrate the advantages of our approach on two applications from insurance. KEYWORDS Extreme values; Generalized Pareto distribution; Jeffreys’ prior; Lindsey method; Mixture distribution; Semiparametric density estimation. 1. INTRODUCTION In the past two decades there has been an increasing interest in statistical modeling for estimating the probability of rare and extreme events. These mod- els are of interest in numerous disciplines such as environmental sciences, engi- neering, fnance and insurance, among others (see for instance Coles (2001) and Smith (2003)). In this paper, we mainly focus on insurance applications, see for instance Mikosh (2003), Chavez-Demoulin and V. Embrechts (2009), Donnelly and Embrechts (2010) and references therein. The Generalized Pareto