Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts

Saturday, July 28, 2018

Simple Gaussian Processes For Regression

In this post I am implementing a simple Gaussian Process Regressor. A Gaussian Process is a
probabilistic kernel model. Basically I am following the "Machine Learning: A probabilistic Perspective" book by Kevin Murphy.

The Basics

For an input $x_i$ and output $y_i = f(x_i)$, infer a distribution over functions of the data:
$p(f | X, y)$. In order to make predictions $y*$ for a new data point $x*$ given all the previous observations, we define:

$p(y*|x*, X, y) = \int p(y*|f, x*) p(f|x, y) df$

For our data $X = x_1 ... x_n$ the Gaussian process assumption is that the the distributions over functions $p(f_1 ... f_N)$ is jointly Gaussian with mean $\mu(x)$ and a covariance function $\Sigma_{ij} = k(x_i, x_j)$ and a kernel $k$.

Covariance structure

It is quite common to leaf the mean function at zero. Given a kernel, we need to compute the covariance function between all training and test instances. However, we structure the kernel matrix in the following way. 



The sub-matrix $K$ describes the affinity between all training instances and the sub-matrix $K*$ describes the affinity between training and test instances. Finally, the submatrix $K**$ describes the affinity between test instances to itself. The image above shows the final covariance structure. With that, our function $f*$ can be inferred as: $(f, f*) ~ N(0, \Sigma)$.

In order to obtain the prediction calculate: $f* = K_*  \bullet K^{-1} \bullet f$.
If we want the find the variance of the predictions we calculate: $trace(K_{**} - K_*  \bullet K^{-1} \bullet  K_*^T)$

In my opinion the method is very similar to support vector machines and to instance beased learning methods in general. The difference is that a SVM is only using a small set of training examples called support vectors, while the Gaussian process compares every example to all others in order to make a prediction.


A Naive Gaussian Process

Below I implemented a naive Gaussian process using numpy. Basically, I am building the three components of the covariance structure and then solve the prediction equations above. I call my method naive since computing the inverse has a worst case complexity of $O(n^3)$
So it is not advisable to use this method for larger datasets.
class GaussianProcess:
    
    def __init__(self, kernel):
        self.kernel = kernel
        
    def predict(self, train_x, train_y, test_x):
        (n, _) = train_x.shape
        (m, _) = test_x.shape
        covar_train      = np.zeros((n, n))
        covar_train_test = np.zeros((n, m))
        covar_test       = np.zeros((m, m))
        for i in range(0, n):
            for j in range(0, n):
                covar_train[i, j] = self.kernel.k(train_x[i], train_x[j], i == j)
        for i in range(0, m):
            for j in range(0, m):
                covar_test[i, j] = self.kernel.k(test_x[i], test_x[j], i == j)
        for i in range(0, n):
            for j in range(0, m):
                covar_train_test[i, j] = self.kernel.k(train_x[i], test_x[j], False)
        covar_inv  = np.linalg.inv(covar_train)
        prediction = np.dot(np.dot(covar_train_test.T, covar_inv), train_y)
        confidence = covar_test - np.dot(covar_train_test.T, np.dot(covar_inv, covar_train_test))
        confidence = np.sqrt(np.array([confidence[i, i] for i in range(0, m)]))
        return prediction, confidence 


Squared Exponential Kernel

For my experiments I use a squared exponential kernel and also add a variance parameter for for noisy observations:

$k(x_i, x_j) = \sigma_f^2 e^{-\frac{1}{2l^2} || x_i - x_j ||_2^2} + \sigma_y^2 \mathbb{I}(i == j)$

The parameters are as follows:
  • $\sigma_f^2$: Variance giving the scale of the output
  • $\sigma_y^2 \mathbb{I}(i == j)$: Noise variance applied to diagnoal
  • $l$: Scale on input
again, the implementation is quite simple in numpy.
class SquaredExponential:

    def __init__(self, variance, alpha, noise):
        self.alpha = alpha
        self.variance = variance
        self.noise = noise
        self.scaler = -1.0 / (2 * alpha**2)
        
    def k(self, a, b, on_diag):
        error  = np.sum(np.square(a - b))
        f      = np.exp(self.scaler * error)
        scaled = self.variance * f
        if on_diag:
            scaled += self.noise
        return scaled   


Results on some simple example datasets

I tried my method on three datasets, 2 times, I am intepolating stock marktet data and one time a sine wave. Each time, the index is the input to the method and the output for the stock market prediction is the closing price.
Sine Wave Interpolation:

Stock Interpolation Dax:

Stock Interpolation US:

Tuesday, August 1, 2017

Investigating Non Linear Optimization in Python

I recently skimmed through some class videos by Tucker Balch, Professor at Georgia Tech called "Machine Learning For Trading". One interesting part was portfolio optimisation.
That is, if you want to invest some amount of money, how do you distribute it
over a selection of assets in a way minimising risk while at the same time
being able to earn money through your investment. A portfolio is basically an allocation of the money into different options or in other words, the percentage of the total amount of money allocated to an option. Anyways, in the class as well as the course book the optimisation is performed using a
python method for constrained non-linear optimisation.  The algorithm used to crunch these problems is called Sequential Least Squares Programming, which is implement using a fortran wrapper.
The original algorithm can be found in the ACM Algorithms catalog (Algorithm 733)
written by D. Kraft. The code is automatically translated using the fortran to python (f2py)
library.