Extreme shock models: an alternative perspective

Abstract

Extreme shock models have been introduced in Gut and H\"usler (1999) to study systems that at random times are subject to shock of random magnitude. These systems break down when some shock overcomes a given resistance level. In this paper we propose an alternative approach to extreme shock models using reinforced urn processes. As a consequence of this we are able to look at the same problem under a Bayesian nonparametric perspective, providing the predictive distribution of systems' defaults.