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.^[1] The series are the same; but, the arrangement of terms (and thus the accuracy of truncating the series) differ.^[2] The key idea of these expansions is to write the characteristic function of the distribution whose probability density function $f$ is 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.

Gram–Charlier A series

We examine a continuous random variable. Let ${\hat {f}}$ 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 ${\hat {\psi }}$ , 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 (see Wallace, 1958)^[3]

{\hat {f}}(t)=\exp \left[\sum _{r=1}^{\infty }\kappa _{r}{\frac {(it)^{r}}{r!}}\right]

and

{\hat {\psi }}(t)=\exp \left[\sum _{r=1}^{\infty }\gamma _{r}{\frac {(it)^{r}}{r!}}\right],

which gives the following formal identity:

{\hat {f}}(t)=\exp \left[\sum _{r=1}^{\infty }(\kappa _{r}-\gamma _{r}){\frac {(it)^{r}}{r!}}\right]{\hat {\psi }}(t)\,.

By the properties of the Fourier transform, $(it)^{r}{\hat {\psi }}(t)$ 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

\phi (x)={\frac {1}{{\sqrt {2\pi }}\sigma }}\exp \left[-{\frac {(x-\mu )^{2}}{2\sigma ^{2}}}\right]

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]\phi (x),

since $\gamma _{r}=0$ for all $r$ > 2, as higher cumulants of the normal distribution are 0. By expanding the exponential and collecting terms according to the order of the derivatives, we arrive at the Gram–Charlier A series. Such an expansion can be written compactly in terms of Bell polynomials as

\exp \left[\sum _{r=3}^{\infty }\kappa _{r}{\frac {(-D)^{r}}{r!}}\right]=\sum _{n=0}^{\infty }B_{n}(0,0,\kappa _{3},\ldots ,\kappa _{n}){\frac {(-D)^{n}}{n!}}.

Since the n-th derivative of the Gaussian function $\phi$ is given in terms of Hermite polynomial as

\phi ^{(n)}(x)={\frac {(-1)^{n}}{\sigma ^{n}}}He_{n}\left({\frac {x-\mu }{\sigma }}\right)\phi (x),

this gives us the final expression of the Gram-Charlier A series as

f(x)=\phi (x)\sum _{n=0}^{\infty }{\frac {1}{n!\sigma ^{n}}}B_{n}(0,0,\kappa _{3},\ldots ,\kappa _{n})He_{n}\left({\frac {x-\mu }{\sigma }}\right).

Integrating the series gives us the cumulative distribution function

F(x)=\int _{-\infty }^{x}f(u)du=\Phi (x)-\phi (x)\sum _{n=3}^{\infty }{\frac {1}{n!\sigma ^{n-1}}}B_{n}(0,0,\kappa _{3},\ldots ,\kappa _{n})He_{n-1}\left({\frac {x-\mu }{\sigma }}\right),

where $\Phi$ is the CDF of the normal distribution.

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}}}He_{3}\left({\frac {x-\mu }{\sigma }}\right)+{\frac {\kappa _{4}}{4!\sigma ^{4}}}He_{4}\left({\frac {x-\mu }{\sigma }}\right)\right]\,,

with $He_{3}(x)=x^{3}-3x$ and $He_{4}(x)=x^{4}-6x^{2}+3$ .

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.

The Edgeworth series

Edgeworth developed a similar expansion as an improvement to the central limit theorem.^[4] The advantage of the Edgeworth series is that the error is controlled, so that it is a true asymptotic expansion.

Let $\{Z_{i}\}$ be a sequence of independent and identically distributed random variables with mean $\mu$ and variance $\sigma ^{2}$ , and let $X_{n}$ be their standardized sums:

X_{n}={\frac {1}{\sqrt {n}}}\sum _{i=1}^{n}{\frac {Z_{i}-\mu }{\sigma }}.

Let $F_{n}$ denote the cumulative distribution functions of the variables $X_{n}$ . 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, in addition to having mean $\mu$ and variance $\sigma ^{2}$ , the i.i.d. random variables $Z_{i}$ have higher cumulants $\kappa _{r}$ . From the additivity and homogeneity properties of cumulants, the cumulants of $X_{n}$ in terms of the cumulants of $Z_{i}$ are for $r \geq 2$ ,

\kappa _{r}^{F_{n}}={\frac {n\kappa _{r}}{\sigma ^{r}n^{r/2}}}={\frac {\lambda _{r}}{n^{r/2-1}}}\quad \mathrm {where} \quad \lambda _{r}={\frac {\kappa _{r}}{\sigma ^{r}}}.

If we expand in terms of the standard normal distribution, that is, if we set

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

then the cumulant differences in the formal expression of the characteristic function ${\hat {f}}_{n}(t)$ of $F_{n}$ are

\kappa _{1}^{F_{n}}-\gamma _{1}=0,

\kappa _{2}^{F_{n}}-\gamma _{2}=0,

\kappa _{r}^{F_{n}}-\gamma _{r}={\frac {\lambda _{r}}{n^{r/2-1}}};\qquad r\geq 3.

The Gram-Charlier A series for the density function of $X_{n}$ is now

f_{n}(x)=\phi (x)\sum _{r=0}^{\infty }{\frac {1}{r!}}B_{r}\left(0,0,{\frac {\lambda _{3}}{n^{1/2}}},\ldots ,{\frac {\lambda _{r}}{n^{r/2-1}}}\right)He_{r}(x).

The Edgeworth series is developed similarly to the Gram–Charlier A series, only that now terms are collected according to powers of $n$ . The coefficients of n^-m/2 term can be obtained by collecting the monomials of the Bell polynomials corresponding to the integer partitions of m. Thus, we have the characteristic function as

{\hat {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)\,.

Likewise, integrating the series, we obtain the distribution function

F_{n}(x)=\Phi (x)+\sum _{j=1}^{\infty }{\frac {1}{n^{j/2}}}{\frac {P_{j}(-D)}{D}}\phi (x)\,.

We can explicitly write the polynomial $P_{m}(-D)$ as

P_{m}(-D)=\sum \prod _{i}{\frac {1}{k_{i}!}}\left({\frac {\lambda _{l_{i}}}{l_{i}!}}\right)^{k_{i}}(-D)^{s},

where the summation is over all the integer partitions of m such that $\sum _{i}ik_{i}=m$ and $l_{i}=i+2$ and $s=\sum _{i}k_{i}l_{i}.$

For example, if m = 3, then there are three ways to partition this number: 1 + 1 + 1 = 2 + 1 = 3. As such we need to examine three cases:

1 + 1 + 1 = 1 · k₁, so we have k₁ = 3, l₁ = 3, and s = 9.
1 + 2 = 1 · k₁ + 2 · k₂, so we have k₁ = 1, k₂ = 1, l₁ = 3, l₂ = 4, and s = 7.
3 = 3 · k₃, so we have k₃ = 1, l₃ = 5, and s = 5.

Thus, the required polynomial is

{\begin{aligned}P_{3}(-D)&={\frac {1}{3!}}\left({\frac {\lambda _{3}}{3!}}\right)^{3}(-D)^{9}+{\frac {1}{1!1!}}\left({\frac {\lambda _{3}}{3!}}\right)\left({\frac {\lambda _{4}}{4!}}\right)(-D)^{7}+{\frac {1}{1!}}\left({\frac {\lambda _{5}}{5!}}\right)(-D)^{5}\\&={\frac {\lambda _{3}^{3}}{1296}}(-D)^{9}+{\frac {\lambda _{3}\lambda _{4}}{144}}(-D)^{7}+{\frac {\lambda _{5}}{120}}(-D)^{5}.\end{aligned}}

The first five terms of the expansion are^[5]

{\begin{aligned}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{aligned}}

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 $\phi ^{(n)}(x)=(-1)^{n}He_{n}(x)\phi (x)$ , (where $He_{n}$ 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.^[6]

Illustration: density of the sample mean of three $\chi ^{2}$

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 need 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

↑ Stuart, A., & Kendall, M. G. (1968). The advanced theory of statistics. Hafner Publishing Company.
↑ Kolassa, J. E. (2006). Series approximation methods in statistics (Vol. 88). Springer Science & Business Media.
↑ Wallace, D. L. (1958). Asymptotic approximations to distributions. The Annals of Mathematical Statistics, 635-654.
↑ Hall, P. (2013). The bootstrap and Edgeworth expansion. Springer Science & Business Media.
↑ Weisstein, Eric W. "Edgeworth Series". MathWorld.
↑ Kolassa, John E.; McCullagh, Peter (1990). "Edgeworth series for lattice distributions". Annals of Statistics. 18 (2): 981–985. doi:10.1214/aos/1176347637. JSTOR 2242145.