The conditional independence between X features is an essential requirement for the Naïve Bayes classifier. It also restricts its applicability. The Naïve Bayes classification is better understood through simple and concrete examples [5:5].
Let's consider the problem of how to predict a change in interest rates.
The first step is to list the factors that potentially may trigger or cause an increase or decrease in the interest rates. For the sake of illustrating Naïve Bayes, we will select the consumer price index (CPI) and change the Federal fund rate (FDF) and the gross domestic product (GDP), as the first set of features. The terminology is described in the Terminology section under Finances 101 in the Appendix A, Basic Concepts.
The use case is used to predict the direction of the change in the yield of the 1-year Treasury bill (1yTB), taking into account the change in the current CPI, FDF, and GDP. The objective is, therefore...