Book Image

Python for Finance Cookbook

By : Eryk Lewinson
Book Image

Python for Finance Cookbook

By: Eryk Lewinson

Overview of this book

Python is one of the most popular programming languages used in the financial industry, with a huge set of accompanying libraries. In this book, you'll cover different ways of downloading financial data and preparing it for modeling. You'll calculate popular indicators used in technical analysis, such as Bollinger Bands, MACD, RSI, and backtest automatic trading strategies. Next, you'll cover time series analysis and models, such as exponential smoothing, ARIMA, and GARCH (including multivariate specifications), before exploring the popular CAPM and the Fama-French three-factor model. You'll then discover how to optimize asset allocation and use Monte Carlo simulations for tasks such as calculating the price of American options and estimating the Value at Risk (VaR). In later chapters, you'll work through an entire data science project in the financial domain. You'll also learn how to solve the credit card fraud and default problems using advanced classifiers such as random forest, XGBoost, LightGBM, and stacked models. You'll then be able to tune the hyperparameters of the models and handle class imbalance. Finally, you'll focus on learning how to use deep learning (PyTorch) for approaching financial tasks. By the end of this book, you’ll have learned how to effectively analyze financial data using a recipe-based approach.
Table of Contents (12 chapters)

Implementing the four- and five-factor models in Python

In this recipe, we implement two extensions of the Fama-French three-factor model.

Carhart's Four-Factor model: The underlying assumption of this extension is that, within a short period of time, a winner stock will remain a winner, while a loser will remain a loser. An example of a criterion for classifying winners and losers could be the last 12-month cumulative total returns. After identifying the two groups, we long the winners and short the losers within a certain holding period.

The momentum factor (WML; Winners Minus Losers) measures the excess returns of the winner stocks over the loser stocks in the past 12 months (please refer to the See also section of this recipe for references on the calculations of the momentum factor).

The four-factor model can be expressed:

Fama-French's Five-Factor model: Fama...