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)

Fitting a decision tree classifier

A decision tree classifier is a relatively simple, yet very important machine learning algorithm, for both regression and classification problems. The name comes from the fact that the model creates a set of rules (for example: if x_1 > 50 and x_2 < 10 then y = 'default'), which taken together can be visualized in the form of a tree. The decision trees segment the feature space into a number of smaller regions, by repeatedly splitting the features at a certain value. To do so, they use a greedy algorithm (together with some heuristics) to find a split that minimizes the combined impurity of the children nodes (measured using the Gini impurity or entropy).

In the case of a binary classification problem, the algorithm tries to obtain nodes that contain as many observations from one class as possible, thus minimizing the impurity...