Modelling and Understanding Count Processes Through a Markov-Modulated Non-Homogeneous Poisson Process Framework

27 Pages Posted: 4 Apr 2019 Last revised: 12 Jul 2019

See all articles by Benjamin Avanzi

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies

Greg Taylor

UNSW Australia Business School, School of Risk & Actuarial Studies

Bernard Wong

UNSW Australia Business School, School of Risk & Actuarial Studies

Alan Xian

UNSW Australia Business School, School of Risk & Actuarial Studies

Date Written: March 18, 2019

Abstract

The Markov-modulated Poisson process is utilised for count modelling in a variety of areas such as queueing, reliability, network and insurance claims analysis. In this paper, we extend the Markov-modulated Poisson process framework through the introduction of a flexible frequency perturbation measure. This contribution enables known information of observed event arrivals to be naturally incorporated in a tractable manner, while the hidden Markov chain captures the effect of unobservable drivers of the data. In addition to increases in accuracy and interpretability, this method supplements analysis of the latent factors. Further, this procedure naturally incorporates data features such as over-dispersion and autocorrelation. Additional insights can be generated to assist analysis, including a procedure for iterative model improvement.

Implementation difficulties are also addressed with a focus on dealing with large data sets, where latent models are especially advantageous due the large number of observations facilitating identification of hidden factors. Namely, computational issues such as numerical underflow and high processing cost arise in this context and in this paper, we produce procedures to overcome these problems.

This modelling framework is demonstrated using a large insurance data set to illustrate theoretical, practical and computational contributions and an empirical comparison to other count models highlight the advantages of the proposed approach.

Keywords: Risk analysis, Markov processes, Count processes, Data analysis, EM algorithm

Suggested Citation

Avanzi, Benjamin and Taylor, Greg and Wong, Bernard and Xian, Alan, Modelling and Understanding Count Processes Through a Markov-Modulated Non-Homogeneous Poisson Process Framework (March 18, 2019). UNSW Business School Research Paper No. 2019ACTL01. Available at SSRN: https://ssrn.com/abstract=3354342 or http://dx.doi.org/10.2139/ssrn.3354342

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies ( email )

UNSW Sydney, NSW 2052
Australia

Greg Taylor

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

Level 6, East Lobby
UNSW Business School Building, UNSW
Sydney, NSW 2052
Australia
+61 421 338 448 (Phone)

Bernard Wong

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

Room 2058 South Wing 2nd Floor
Quadrangle building, Kensington Campus
Sydney, NSW 2052
Australia

Alan Xian (Contact Author)

UNSW Australia Business School, School of Risk & Actuarial Studies

Room 2058 South Wing 2nd Floor
Quadrangle building, Kensington Campus
Sydney, NSW 2052
Australia

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