Book Image

Machine Learning for Finance

By : Jannes Klaas
Book Image

Machine Learning for Finance

By: Jannes Klaas

Overview of this book

Machine Learning for Finance explores new advances in machine learning and shows how they can be applied across the financial sector, including insurance, transactions, and lending. This book explains the concepts and algorithms behind the main machine learning techniques and provides example Python code for implementing the models yourself. The book is based on Jannes Klaas’ experience of running machine learning training courses for financial professionals. Rather than providing ready-made financial algorithms, the book focuses on advanced machine learning concepts and ideas that can be applied in a wide variety of ways. The book systematically explains how machine learning works on structured data, text, images, and time series. You'll cover generative adversarial learning, reinforcement learning, debugging, and launching machine learning products. Later chapters will discuss how to fight bias in machine learning. The book ends with an exploration of Bayesian inference and probabilistic programming.
Table of Contents (15 chapters)
Machine Learning for Finance
Contributors
Preface
Other Books You May Enjoy
Index

Markov processes and the bellman equation – A more formal introduction to RL


Following the long history of modern deep learning being a continuation of quantitative finance with more GPUs, the theoretical foundation of reinforcement learning lies in Markov models.

Note

Note: This section requires a bit of mathematical background knowledge. If you are struggling, there is a beautiful visual introduction by Victor Powell here: http://setosa.io/ev/markov-chains/.

A more formal, but still simple, introduction is available on the website Analytics Vidhya: https://www.analyticsvidhya.com/blog/2014/07/markov-chain-simplified/.

A Markov model describes a stochastic process with different states in which the probability of ending up in a specific state is purely dependent on the state one is currently in. In the following diagram, you can see a simple Markov model describing recommendations given for a stock:

The Markov model

As you can see, there are three states in this model, BUY, HOLD, and SELL. For...