An application of shrinkage to dealing with extreme values
N. T. Longford
Abstract
Trimming and winsorisation are commonly used devices
for reducing the influence
of exceptionally large observations in positively skewed data.
We explore a flexible version winsorisation
based on the general idea of shrinkage.
It can be interpreted as a compromise
between retaining and truncating an outlying observation.
We show that the details of winsorisation should be informed
not only by the distribution of the data
but also by the target of estimation.
To appear in Statistics in Transition 12
June 2008