A peaks over threshold model for change-point detection by wavelets

Newly available wavelet bases on multi-resolution analysis have exciting implications for detection of change-points. By checking the absolute value of wavelet coefficients one call detect discontinuities in ail otherwise smooth curve even in the presence of additive noise. In this paper, we combine wavelet methods and extreme value theory to test the presence of ail arbitrary number of discontinuities in an unknown function observed with noise. Our approach is based on a Peaks Over Threshold modelling of noisy wavelet transforms. Particular features of our method include the estimation of the extreme value index in the tail of the noise distribution. The critical region of our test is, derived using a Generalised Pareto Distribution approximation to normalised sums. Asymptotic results show that our method is powerful in a wide range of medium size wavelet frequencies. We compare our test with competing approaches on simulated examples and illustrate the method on Dow-Jones data.