Approximation of the sum of independent lognormal variates using lognormal distribution by maximum likelihood estimation approached

Abstract

Three methods of approximating the sum of lognormal variates to a lognormal distribution were studied. They were the Wilkinson approximation, the Monte Carlo version of the Wilkinson approximation and the approximation using estimated maximum likelihood lognormal parameters. The lognormal variates were generated empirically using Monte Carlo simulation based on several conditions such as number of lognormal variates in the sum, number of sample points in the variates, the variates are independent and identically distributed (IID) and also not identically distributed (NIID) with lognormal parameters. Evaluation of all three lognormal approximation methods was performed using the Anderson Darling test. Results show that the approximation using estimated maximum likelihood lognormal parameters produced Type I errors close to the 0.05 target and is considered the best approximation.