Refining the Central Limit Theorem Approximation via Extreme Value Theory

Abstract: We suggest approximating the distribution of the sum of independent and identically distributed random variables with a Pareto-like tail by combining extreme value approximations for the largest summands with a normal approximation for the sum of the smaller summands. If the tail is well approximated by a Pareto density, then this new approximation has substantially smaller error rates compared to the usual normal approximation for underlying distributions with finite variance and less than three moments. It can also provide an accurate approximation for some infinite variance distributions.