Matrix Mittag--Leffler distributions and modeling heavy-tailed risks

Abstract: In this paper we define the class of matrix Mittag-Leffler distributions and study some of its properties. We show that it can be interpreted as a particular case of an inhomogeneous phase-type distribution with random scaling factor, and alternatively also as the absorption time of a semi-Markov process with Mittag-Leffler distributed interarrival times. We then identify this class and its power transforms as a remarkably parsimonious and versatile family for the modelling of heavy-tailed risks, which overcomes some disadvantages of other approaches like the problem of threshold selection in extreme value theory. We illustrate this point both on simulated data as well as on a set of real-life MTPL insurance data that were modeled differently in the past.