Application of Machine Learning in Finance | Python for Machine Learning in Finance | Quantra Course
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Machine learning has varied applications in finance.
For instance, machine learning algorithms can create an investment portfolio for you. A human advisor has to study the markets, earn advisory certifications to be confident enough to suggest a portfolio to his clients. On the other hand, an ML algorithm can carry out the same task in seconds. Betterment and Wealthfront are companies who provide investment services through their machine learning platform.
How is the ML algorithm able to create a portfolio for clients in seconds?
First, the ML algorithm receives the details of all the clients as input, and the portfolio advised to these clients. Then, the ML algo learns the relationship between the portfolio advised and the data of the client. The model is now ready for advising the portfolio. If you provide the input on which the model has learnt, such as the fact you are 25 years old and can take high risks.
The model based on the pattern learnt suggests a portfolio inclined towards technology stocks
such as Apple and Facebook. The ML algorithm is really fast and does this in a matter of seconds.
The advantage of speed is harnessed by hedge funds that are using algorithmic trading. Renaissance Technologies is known to use machine learning in its trading strategies. And it has about $55 billion worth of assets in its management.
In a 2019 report, Preqin reported that it followed the performance of 152 ML and AI-driven hedge funds. Preqin compared the AI funds’ performance to their own benchmark of hedge funds. And saw that AI outperformed by 3% points. Aidiya launched in 2016 and is the world’s first AI hedge fund.
Machine learning is known to find patterns in the data very fast. It also removes emotions from the trading decisions. This makes it an ideal candidate for high-frequency trading.
In fact, high-frequency trading firms also use machine learning to find anomalies in real-time. Once they find an opportunity in the market, the ML algorithm places the order before a human could even blink. According to Javelin Strategy & Research, global loss due to fraud reached $56 billion.
Can machine learning help in fraud detection and reduce losses?
Yes, an ML algorithm can process the spending history of individuals’. If you are living in New York and used your credit card at 4 pm in New York. It is unlikely that you will swipe the card in Paris at 6 pm. The ML algorithm can do this for thousands of users at the same time.
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