Taylor expansions for the moments of functions of random variables

In probability theory, it is possible to approximate the moments of a function f of a random variable X using Taylor expansions, provided that f is sufficiently differentiable and that the moments of X are finite. This technique is often used by statisticians.

First moment


\begin{align}
\operatorname{E}\left[f(X)\right] & {} = \operatorname{E}\left[f(\mu_X + \left(X - \mu_X\right))\right] \\
& {} \approx \operatorname{E}\left[f(\mu_X) + f'(\mu_X)\left(X-\mu_X\right) + \frac{1}{2}f''(\mu_X) \left(X - \mu_X\right)^2 \right].
\end{align}

Noting that E[X − μX] = 0, the 2nd term disappears. Also E[(X − μX)2] is \sigma_X^2. Therefore,

\operatorname{E}\left[f(X)\right]\approx f(\mu_X) +\frac{f''(\mu_X)}{2}\sigma_X^2

where μX and \sigma^2_X are the mean and variance of X respectively.

It is possible to generalize this to functions of more than one variable using multivariate Taylor expansions. For example,

\operatorname{E}\left[\frac{X}{Y}\right]\approx\frac{\operatorname{E}\left[X\right]}{\operatorname{E}\left[Y\right]} -\frac{\operatorname{cov}\left[X,Y\right]}{\operatorname{E}\left[Y\right]^2}+\frac{\operatorname{E}\left[X\right]}{\operatorname{E}\left[Y\right]^3}\operatorname{var}\left[Y\right]

Second moment

Analogously,

\operatorname{var}\left[f(X)\right]\approx \left(f'(\operatorname{E}\left[X\right])\right)^2\operatorname{var}\left[X\right] = \left(f'(\mu_X)\right)^2\sigma^2_X.

This is a special case of the delta method. For example,

\operatorname{var}\left[\frac{X}{Y}\right]\approx\frac{\operatorname{var}\left[X\right]}{\operatorname{E}\left[Y\right]^2}-\frac{2\operatorname{E}\left[X\right]}{\operatorname{E}\left[Y\right]^3}\operatorname{cov}\left[X,Y\right]+\frac{\operatorname{E}\left[X\right]^2}{\operatorname{E}\left[Y\right]^4}\operatorname{var}\left[Y\right].

See also


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