Edgeworth series

The Gram–Charlier A series (named in honor of Jørgen Pedersen Gram and Carl Charlier), and the Edgeworth series (named in honor of Francis Ysidro Edgeworth) are series that approximate a probability distribution in terms of its cumulants. The series are the same; but, the arrangement of terms (and thus the accuracy of truncating the series) differ.

Gram–Charlier A series

The key idea of these expansions is to write the characteristic function of the distribution whose probability density function is $F$ to be approximated in terms of the characteristic function of a distribution with known and suitable properties, and to recover $F$ through the inverse Fourier transform.

We examine a continuous random variable. Let $f$ be the characteristic function of its distribution whose density function is $F$ , and $\kappa_r$ its cumulants. We expand in terms of a known distribution with probability density function $Ψ$ , characteristic function $ψ$ , and cumulants $\gamma_r$ . The density $Ψ$ is generally chosen to be that of the normal distribution, but other choices are possible as well. By the definition of the cumulants, we have the following formal identity:

f(t)=\exp\left[\sum_{r=1}^\infty(\kappa_r-\gamma_r)\frac{(it)^r}{r!}\right]\psi(t)\,.

By the properties of the Fourier transform, $(it)^r\psi(t)$ is the Fourier transform of $(-1)^r[D^r\Psi](-x)$ , where $D$ is the differential operator with respect to $x$ . Thus, after changing $x$ with $-x$ on both sides of the equation, we find for $F$ the formal expansion

F(x) = \exp\left[\sum_{r=1}^\infty(\kappa_r - \gamma_r)\frac{(-D)^r}{r!}\right]\Psi(x)\,.

If $Ψ$ is chosen as the normal density with mean and variance as given by $F$ , that is, mean $\mu = \kappa_1$ and variance $\sigma^2 = \kappa_2$ , then the expansion becomes

F(x) = \exp\left[\sum_{r=3}^\infty\kappa_r\frac{(-D)^r}{r!}\right]\frac{1}{\sqrt{2\pi}\sigma}\exp\left[-\frac{(x-\mu)^2}{2\sigma^2}\right].

By expanding the exponential and collecting terms according to the order of the derivatives, we arrive at the Gram–Charlier A series. If we include only the first two correction terms to the normal distribution, we obtain

F(x) \approx \frac{1}{\sqrt{2\pi}\sigma}\exp\left[-\frac{(x-\mu)^2}{2\sigma^2}\right]\left[1+\frac{\kappa_3}{3!\sigma^3}H_3\left(\frac{x-\mu}{\sigma}\right)+\frac{\kappa_4}{4!\sigma^4}H_4\left(\frac{x-\mu}{\sigma}\right)\right]\,,

with $H_3(x)=x^3-3x$ and $H_4(x)=x^4 - 6x^2 + 3$ (these are Hermite polynomials).

Note that this expression is not guaranteed to be positive, and is therefore not a valid probability distribution. The Gram–Charlier A series diverges in many cases of interest—it converges only if $F(x)$ falls off faster than $\exp(-(x^2)/4)$ at infinity (Cramér 1957). When it does not converge, the series is also not a true asymptotic expansion, because it is not possible to estimate the error of the expansion. For this reason, the Edgeworth series (see next section) is generally preferred over the Gram–Charlier A series.

Edgeworth series

Edgeworth developed a similar expansion as an improvement to the central limit theorem. The advantage of the Edgeworth series is that the error is controlled, so that it is a true asymptotic expansion.

Let {X_i} be a sequence of independent and identically distributed random variables with mean μ and variance σ², and let Y_n be their standardized sums:

Y_n = \frac{1}{\sqrt{n}} \sum_{i=1}^n \frac{X_i - \mu}{\sigma}.

Let F_n denote the cumulative distribution functions of the variables Y_n. Then by the central limit theorem,

\lim_{n\to\infty} F_n(x) = \Phi(x) \equiv \int_{-\infty}^x \tfrac{1}{\sqrt{2\pi}}e^{-\frac{1}{2}q^2}dq

for every x, as long as the mean and variance are finite.

Now assume that the random variables X_i have mean μ, variance σ², and higher cumulants κ_r=σ^rλ_r. If we expand in terms of the standard normal distribution, that is, if we set

\Psi(x)=\frac{1}{\sqrt{2\pi}}\exp(-\tfrac{1}{2}x^2)

then the cumulant differences in the formal expression of the characteristic function f_n(t) of F_n are

\kappa^{F(n)}_1-\gamma_1 = 0,

\kappa^{F(n)}_2-\gamma_2 = 0,

\kappa^{F(n)}_r-\gamma_r = \frac{\kappa_r}{\sigma^rn^{r/2-1}} = \frac{\lambda_r}{n^{r/2-1}}; \qquad r\geq 3.

The Edgeworth series is developed similarly to the Gram–Charlier A series, only that now terms are collected according to powers of n. Thus, we have

f_n(t)=\left[1+\sum_{j=1}^\infty \frac{P_j(it)}{n^{j/2}}\right] \exp(-t^2/2)\,,

where P_j(x) is a polynomial of degree 3j. Again, after inverse Fourier transform, the density function F_n follows as

F_n(x) = \Phi(x) + \sum_{j=1}^\infty \frac{P_j(-D)}{n^{j/2}} \Phi(x)\,.

The first five terms of the expansion are^[1]

\begin{align} F_n(x) &= \Phi(x) \\ &\quad -\frac{1}{n^{\frac{1}{2}}}\left(\tfrac{1}{6}\lambda_3\,\Phi^{(3)}(x) \right) \\ &\quad +\frac{1}{n}\left(\tfrac{1}{24}\lambda_4\,\Phi^{(4)}(x) + \tfrac{1}{72}\lambda_3^2\,\Phi^{(6)}(x) \right) \\ &\quad -\frac{1}{n^{\frac{3}{2}}}\left(\tfrac{1}{120}\lambda_5\,\Phi^{(5)}(x) + \tfrac{1}{144}\lambda_3\lambda_4\,\Phi^{(7)}(x) + \tfrac{1}{1296}\lambda_3^3\,\Phi^{(9)}(x)\right) \\ &\quad + \frac{1}{n^2}\left(\tfrac{1}{720}\lambda_6\,\Phi^{(6)}(x) + \left(\tfrac{1}{1152}\lambda_4^2 + \tfrac{1}{720}\lambda_3\lambda_5\right)\Phi^{(8)}(x) + \tfrac{1}{1728}\lambda_3^2\lambda_4\,\Phi^{(10)}(x) + \tfrac{1}{31104}\lambda_3^4\,\Phi^{(12)}(x) \right)\\ &\quad + O \left (n^{-\frac{5}{2}} \right ). \end{align}

Here, $Φ (j) (x)$ is the j-th derivative of $Φ(\cdot)$ at point x. Remembering that the derivatives of the density of the normal distribution are related to the normal density by ϕ⁽ⁿ⁾(x) is (-1)ⁿH_n(x)ϕ(x), (where H_n is the Hermite polynomial of order n), this explains the alternative representations in terms of the density function. Blinnikov and Moessner (1998) have given a simple algorithm to calculate higher-order terms of the expansion.

Note that in case of a lattice distributions (which have discrete values), the Edgeworth expansion must be adjusted to account for the discontinuous jumps between lattice points.^[2]

Illustration: density of the sample mean of 3 Χ²

Density of the sample mean of three chi2 variables. The chart compares the true density, the normal approximation, and two edgeworth expansions

Take $X_i \sim \chi^2(k=2) \qquad i=1, 2, 3$ and the sample mean $\bar X = \frac{1}{3} \sum_{i=1}^{3} X_i$ .

We can use several distributions for $\bar X$ :

The exact distribution, which follows a gamma distribution: $\bar X \sim \mathrm{Gamma}\left(\alpha=n\cdot k /2, \theta= 2/n \right)$ = $\mathrm{Gamma}\left(\alpha=3, \theta= 2/3 \right)$
The asymptotic normal distribution: $\bar X \xrightarrow{n \to \infty} N(k, 2\cdot k /n ) = N(2, 4/3 )$
Two Edgeworth expansion, of degree 2 and 3

Disadvantages of the Edgeworth expansion

Edgeworth expansions can suffer from a few issues:

They are not guaranteed to be a proper probability distribution as:
- The integral of the density needs not integrate to 1
- Probabilities can be negative
They can be inaccurate, especially in the tails, due to mainly two reasons:
- They are obtained under a Taylor series around the mean
- They guarantee (asymptotically) an absolute error, not a relative one. This is an issue when one wants to approximate very small quantities, for which the absolute error might be small, but the relative error important.

References

↑ Weisstein, Eric W., "Edgeworth Series", MathWorld.
↑ Kolassa, John E.; McCullagh, Peter (1990). "Edgeworth series for lattice distributions". Annals of Statistics 18 (2): 981–985. JSTOR 2242145. ‏

Edgeworth series

Gram–Charlier A series

Edgeworth series

Illustration: density of the sample mean of 3 Χ²

Disadvantages of the Edgeworth expansion

See also

References

Further reading