LOGNORMAL DISTRIBUTION

What is the Lognormal Distribution?

The lognormal distribution is a continuous probability distribution
that models right-skewed data. The unimodal shape of the
lognormal distribution is comparable to the Weibull and log-logistic
distributions.

Statisticians use this distribution to model growth rates that are

independent of size, which frequently occurs in biology and
nancial areas. It also models time to failure in reliability studies,
rainfall amounts, species abundance, and the number of moves in
chess games. As the name implies, the lognormal distribution is
related to logs and the normal distribution. If your data follows a
lognormal distribution and you transform it by taking the natural log
of all values, the new values will t a normal distribution. In other
words, when your variable X follows a lognormal distribution,
Ln(X) ts a normal distribution. Hence, you take the logs and get a
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 normal distribution. You can exponentiate a normal distribution
(exp (X)) to obtain the lognormal distribution. In this manner, you
can transform back and forth between pairs of related lognormal
and normal distributions.

The sum of many independent and identically distributed

(IID) variables frequently produces a normal distribution. However,
the product of many IID variables creates a lognormal distribution.
Consider the following to understand why:

If y = x1x2x3, then ln(y) = ln(x1) + ln(x2) + ln(x3)

Because of the multiplication process behind lognormal

distributions, the geometric mean can be a better measure of
central tendency than the arithmetic mean for this distribution.

Lognormal Distribution Parameters

There are several ways to parameterize the lognormal distribution.
I’ll use the location, scale, and threshold parameters. The values of
the location and scale parameters relate to the normal distribution
that the log-transformed data follow, which statisticians also refer to
as the logged distribution.

Speci cally, when you have a normal distribution with the mean of
µ and a standard deviation of σ, the lognormal distribution uses
these values as its location and scale parameters, respectively.
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Threshold Parameter
The threshold parameter de nes the minimum value in a lognormal
distribution. All values must be greater than the threshold.
Therefore, negative threshold values let the distribution handle both
positive and negative values. Zero allows the distribution to contain
only positive values.

When you hold the location and scale parameters constant, the
threshold shifts the distribution left and right, as shown below.
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Lognormal Location Parameter (µ)
The location represents the peak (mean, median, and mode) of the
normally distributed data. In the lognormal distribution, take e and
raise it by the location value (e μ) to nd the median of the
lognormal distribution.

In the graph below, the threshold and scale parameters are held.
constant to highlight the effect of changing the location parameter.
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The plot below shows the use of lognormal distribution to model
global incomes. It illustrates how the location parameter is the
median of this distribution. The graph below displays the
probability distribution function for this lognormal distribution.

The shaded 50% of the distribution corresponds to the median

value of 28,788. You can also obtain this value by taking e and
raising it by the location value. In this case, e10.2677 = 28,788.

Scale Parameter (σ)

The scale represents the standard deviation of the normally
distributed data.

In the chart below, the threshold and location parameters are held
constant to emphasize the effect of changing the scale parameter.