In this paper, a penalized maximal t test (PMT) is proposed for detecting undocumented mean shifts in climate data series. PMT takes the relative position of each candidate changepoint into account, to diminish the effect of unequal sample sizes on the power of detection. Monte Carlo simulation studies are conducted to evaluate the performance of PMT, in comparison with the most popularly used method, the standard normal homogeneity test (SNHT). An application of the two methods to atmospheric pressure series recorded at a Canadian site is also presented. It is shown that the false-alarm rate of PMT is very close to the specified level of significance and is evenly distributed across all candidate changepoints, whereas that of SNHT can be up to 10 times the specified level for points near the ends of series and much lower for the middle points. In comparison with SNHT, therefore, PMT has higher power for detecting all changepoints that are not too close to the ends of series and lower power for detecting changepoints that are near the ends of series. On average, however, PMT has significantly higher power of detection. The smaller the shift magnitude Δ is relative to the noise standard deviation σ, the greater is the improvement of PMT over SNHT. The improvement in hit rate can be as much as 14%–25% for detecting small shifts (Δ < σ) regardless of time series length and up to 5% for detecting medium shifts (Δ = σ–1.5σ) in time series of length N < 100. For all detectable shift sizes, the largest improvement is always obtained when N < 100, which is of great practical importance, because most annual climate data series are of length N < 100.

This study integrates a Box–Cox power transformation procedure into a common trend two-phase regression-model-based test (the extended version of the penalized maximal F test, or “PMFred,” algorithm) for detecting changepoints to make the test applicable to non-Gaussian data series, such as nonzero daily precipitation amounts or wind speeds. The detection-power aspects of the transformed method (transPMFred) are assessed by a simulation study that shows that this new algorithm is much better than the corresponding untransformed method for non-Gaussian data; the transformation procedure can increase the hit rate by up to ∼70%. Examples of application of this new transPMFred algorithm to detect shifts in real daily precipitation series are provided using nonzero daily precipitation series recorded at a few stations across Canada that represent very different precipitation regimes. The detected changepoints are in good agreement with documented times of changes for all of the example series. This study clarifies that it is essential for homogenization of daily precipitation data series to test the nonzero precipitation amount series and the frequency series of precipitation occurrence (or nonoccurrence), separately. The new transPMFred can be used to test the series of nonzero daily precipitation (which are non Gaussian and positive), and the existing PMFred algorithm can be used to test the frequency series. A software package for using the transPMFred algorithm to detect shifts in nonzero daily precipitation amounts has been developed and made freely available online, along with a quantile-matching (QM) algorithm for adjusting shifts in nonzero daily precipitation series, which is applicable to all positive data. In addition, a similar QM algorithm has also been developed for adjusting Gaussian data such as temperatures. It is noticed that frequency discontinuities are often inevitable because of changes in the measuring precision of precipitation, and that they could complicate the detection of shifts in nonzero daily precipitation data series and void any attempt to homogenize the series. In this case, one must account for all frequency discontinuities before attempting to adjust the measured amounts. This study also proposes approaches to account for detected frequency discontinuities, for example, to fill in the missed measurements of small precipitation or the missed reports of trace precipitation. It stresses the importance of testing the homogeneity of the frequency series of reported zero precipitation and of various small precipitation events, along with testing the series of daily precipitation amounts that are larger than a small threshold value, varying the threshold over a set of small values that reflect changes in measuring precision over time.

This paper presents an improved method of applying entropy as a risk in portfolio optimization. A new family of portfolio optimization problems called the return-entropy portfolio optimization (REPO) is introduced that simplifies the computation of portfolio entropy using a combinatorial approach. REPO addresses five main practical concerns with the mean-variance portfolio optimization (MVPO). Pioneered by Harry Markowitz, MVPO revolutionized the financial industry as the first formal mathematical approach to risk-averse investing. REPO uses a mean-entropy objective function instead of the mean-variance objective function used in MVPO. REPO also simplifies the portfolio entropy calculation by utilizing combinatorial generating functions in the optimization objective function. REPO and MVPO were compared by emulating competing portfolios over historical data and REPO significantly outperformed MVPO in a strong majority of cases.