Advances in machine learning algorithms for financial risk management

In this thesis, three novel machine learning techniques are introduced to address distinct yet interrelated challenges involved in financial risk management tasks. These approaches collectively offer a comprehensive strategy, beginning with the precise classification of credit risks, advancing through the nuanced forecasting of financial asset volatility, and ending with the strategic optimisation of financial asset portfolios. Firstly, a Hybrid Dual-Resampling and Cost-Sensitive technique has been proposed to combat the prevalent issue of class imbalance in financial datasets, particularly in credit risk assessment. The key process involves the creation of heuristically balanced datasets to effectively address the problem. It uses a resampling technique based on Gaussian mixture modelling to generate a synthetic minority class from the minority class data and concurrently uses k-means clustering on the majority class. Feature selection is then performed using the Extra Tree Ensemble technique. Subsequently, a cost-sensitive logistic regression model is then applied to predict the probability of default using the heuristically balanced datasets. The results underscore the effectiveness of our proposed technique, with superior performance observed in comparison to other imbalanced preprocessing approaches. This advancement in credit risk classification lays a solid foundation for understanding individual financial behaviours, a crucial first step in the broader context of financial risk management. Building on this foundation, the thesis then explores the forecasting of financial asset volatility, a critical aspect of understanding market dynamics. A novel model that combines a Triple Discriminator Generative Adversarial Network with a continuous wavelet transform is proposed. The proposed model has the ability to decompose volatility time series into signal-like and noise-like frequency components, to allow the separate detection and monitoring of non-stationary volatility data. The network comprises of a wavelet transform component consisting of continuous wavelet transforms and inverse wavelet transform components, an auto-encoder component made up of encoder and decoder networks, and a Generative Adversarial Network consisting of triple Discriminator and Generator networks. The proposed Generative Adversarial Network employs an ensemble of unsupervised loss derived from the Generative Adversarial Network component during training, supervised loss and reconstruction loss as part of its framework. Data from nine financial assets are employed to demonstrate the effectiveness of the proposed model. This approach not only enhances our understanding of market fluctuations but also bridges the gap between individual credit risk assessment and macro-level market analysis. Finally the thesis ends with a novel proposal of a novel technique or Portfolio optimisation. This involves the use of a model-free reinforcement learning strategy for portfolio optimisation using historical Low, High, and Close prices of assets as input with weights of assets as output. A deep Capsules Network is employed to simulate the investment strategy, which involves the reallocation of the different assets to maximise the expected return on investment based on deep reinforcement learning. To provide more learning stability in an online training process, a Markov Differential Sharpe Ratio reward function has been proposed as the reinforcement learning objective function. Additionally, a Multi-Memory Weight Reservoir has also been introduced to facilitate the learning process and optimisation of computed asset weights, helping to sequentially re-balance the portfolio throughout a specified trading period. The use of the insights gained from volatility forecasting into this strategy shows the interconnected nature of the financial markets. Comparative experiments with other models demonstrated that our proposed technique is capable of achieving superior results based on risk-adjusted reward performance measures. In a nut-shell, this thesis not only addresses individual challenges in financial risk management but it also incorporates them into a comprehensive framework; from enhancing the accuracy of credit risk classification, through the improvement and understanding of market volatility, to optimisation of investment strategies. These methodologies collectively show the potential of the use of machine learning to improve financial risk management

The Role of Synthetic Data in Improving Supervised Learning Methods: The Case of Land Use/Land Cover Classification

A thesis submitted in partial fulfillment of the requirements for the degree of Doctor in Information ManagementIn remote sensing, Land Use/Land Cover (LULC) maps constitute important assets for various applications, promoting environmental sustainability and good resource management. Although, their production continues to be a challenging task. There are various factors that contribute towards the difficulty of generating accurate, timely updated LULC maps, both via automatic or photo-interpreted LULC mapping. Data preprocessing, being a crucial step for any Machine Learning task, is particularly important in the remote sensing domain due to the overwhelming amount of raw, unlabeled data continuously gathered from multiple remote sensing missions. However a significant part of the state-of-the-art focuses on scenarios with full access to labeled training data with relatively balanced class distributions. This thesis focuses on the challenges found in automatic LULC classification tasks, specifically in data preprocessing tasks. We focus on the development of novel Active Learning (AL) and imbalanced learning techniques, to improve ML performance in situations with limited training data and/or the existence of rare classes. We also show that much of the contributions presented are not only successful in remote sensing problems, but also in various other multidisciplinary classification problems. The work presented in this thesis used open access datasets to test the contributions made in imbalanced learning and AL. All the data pulling, preprocessing and experiments are made available at https://github.com/joaopfonseca/publications. The algorithmic implementations are made available in the Python package ml-research at https://github.com/joaopfonseca/ml-research

HYBRID FEATURE SELECTION AND SUPPORT VECTOR MACHINE FRAMEWORK FOR PREDICTING MAINTENANCE FAILURES

The main aim of predictive maintenance is to minimize downtime, failure risks and maintenance costs in manufacturing systems. Over the past few years, machine learning methods gained ground with diverse and successful applications in the area of predictive maintenance. This study shows that performing preprocessing techniques such as oversampling and features selection for failure prediction, is promising. For instance, to handle imbalanced data, the SMOTE-Tomek method is used. For features selection, three different methods can be applied: Recursive Feature Elimination, Random Forest and Variance Threshold. The data considered in this paper for simulation is used in literature; it is applied to aircraft engine sensors measurements to predict engines failure, while the predicting algorithm used is a Support Vector Machine. The results show that classification accuracy can be significantly boosted by using the preprocessing techniques

Addressing class imbalance for logistic regression

The challenge of class imbalance arises in classification problem when the minority class is observed much less than the majority class. This characteristic is endemic in many domains. Work by [Owen, 2007] has shown that, in a theoretical context related to infinite imbalance, logistic regression behaves such that all data in the rare class can be replaced by their mean vector to achieve the same coefficient estimates. Such results suggest that cluster structure among the minority class may be a specific problem in highly imbalanced logistic regression. In this thesis, we focus on highly imbalanced logistic regression and develop mitigation methods and diagnostic tools. Theoretically, we extend the [Owen, 2007] results to show the phenomenon remains true for both weighted and penalized likelihood methods in the infinitely imbalanced regime, which suggests these alternative choices to logistic regression are not enough for highly imbalanced logistic regression. For mitigation methods, we propose a novel relabeling solution based on relabeling the minority class to handle imbalance problem when using logistic regression, which essentially assigns new labels to the minority class observations. Two algorithms (the Genetic algorithm and the Expectation Maximization algorithm) are formalized to serve as tools for computing this relabeling. In simulation and real data experiments, we show that logistic regression is not able to provide the best out-of-sample predictive performance, and our relabeling approach that can capture underlying structure in the minority class is often superior. For diagnostic tools to detect highly imbalanced logistic regression, different hypothesis testing methods, along with a graphical tool are proposed, based on the mathematical insights about highly imbalanced logistic regression. Simulation studies provide evidence that combining our diagnostic tools with mitigation methods as a systematic strategy has the potential to alleviate the class imbalance problem among logistic regression.Open Acces

Statistical Challenges and Methods for Missing and Imbalanced Data

Missing data remains a prevalent issue in every area of research. The impact of missing data, if not carefully handled, can be detrimental to any statistical analysis. Some statistical challenges associated with missing data include, loss of information, reduced statistical power and non-generalizability of findings in a study. It is therefore crucial that researchers pay close and particular attention when dealing with missing data. This multi-paper dissertation provides insight into missing data across different fields of study and addresses some of the above mentioned challenges of missing data through simulation studies and application to real datasets. The first paper of this dissertation addresses the dropout phenomenon in single-cell RNA (scRNA) sequencing through a comparative analyses of some existing scRNA sequencing techniques. The second paper of this work focuses on using simulation studies to assess whether it is appropriate to address the issue of non-detects in data using a traditional substitution approach, imputation, or a non-imputation based approach. The final paper of this dissertation presents an efficient strategy to address the issue of imbalance in data at any degree (whether moderate or highly imbalanced) by combining random undersampling with different weighting strategies. We conclude generally, based on findings from this dissertation that, missingness is not always lack of information but interestingness that needs to investigated

Estudio de métodos de construcción de ensembles de clasificadores y aplicaciones

La inteligencia artificial se dedica a la creación de sistemas informáticos con un comportamiento inteligente. Dentro de este área el aprendizaje computacional estudia la creación de sistemas que aprenden por sí mismos. Un tipo de aprendizaje computacional es el aprendizaje supervisado, en el cual, se le proporcionan al sistema tanto las entradas como la salida esperada y el sistema aprende a partir de estos datos. Un sistema de este tipo se denomina clasificador. En ocasiones ocurre, que en el conjunto de ejemplos que utiliza el sistema para aprender, el número de ejemplos de un tipo es mucho mayor que el número de ejemplos de otro tipo. Cuando esto ocurre se habla de conjuntos desequilibrados. La combinación de varios clasificadores es lo que se denomina "ensemble", y a menudo ofrece mejores resultados que cualquiera de los miembros que lo forman. Una de las claves para el buen funcionamiento de los ensembles es la diversidad. Esta tesis, se centra en el desarrollo de nuevos algoritmos de construcción de ensembles, centrados en técnicas de incremento de la diversidad y en los problemas desequilibrados. Adicionalmente, se aplican estas técnicas a la solución de varias problemas industriales.Ministerio de Economía y Competitividad, proyecto TIN-2011-2404

Data Optimization in Deep Learning: A Survey

Large-scale, high-quality data are considered an essential factor for the successful application of many deep learning techniques. Meanwhile, numerous real-world deep learning tasks still have to contend with the lack of sufficient amounts of high-quality data. Additionally, issues such as model robustness, fairness, and trustworthiness are also closely related to training data. Consequently, a huge number of studies in the existing literature have focused on the data aspect in deep learning tasks. Some typical data optimization techniques include data augmentation, logit perturbation, sample weighting, and data condensation. These techniques usually come from different deep learning divisions and their theoretical inspirations or heuristic motivations may seem unrelated to each other. This study aims to organize a wide range of existing data optimization methodologies for deep learning from the previous literature, and makes the effort to construct a comprehensive taxonomy for them. The constructed taxonomy considers the diversity of split dimensions, and deep sub-taxonomies are constructed for each dimension. On the basis of the taxonomy, connections among the extensive data optimization methods for deep learning are built in terms of four aspects. We probe into rendering several promising and interesting future directions. The constructed taxonomy and the revealed connections will enlighten the better understanding of existing methods and the design of novel data optimization techniques. Furthermore, our aspiration for this survey is to promote data optimization as an independent subdivision of deep learning. A curated, up-to-date list of resources related to data optimization in deep learning is available at \url{https://github.com/YaoRujing/Data-Optimization}

Credit Risk Scoring: A Stacking Generalization Approach

Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and ManagementCredit risk regulation has been receiving tremendous attention, as a result of the effects of the latest global financial crisis. According to the developments made in the Internal Rating Based approach, under the Basel guidelines, banks are allowed to use internal risk measures as key drivers to assess the possibility to grant a loan to an applicant. Credit scoring is a statistical approach used for evaluating potential loan applications in both financial and banking institutions. When applying for a loan, an applicant must fill out an application form detailing its characteristics (e.g., income, marital status, and loan purpose) that will serve as contributions to a credit scoring model which produces a score that is used to determine whether a loan should be granted or not. This enables faster and consistent credit approvals and the reduction of bad debt. Currently, many machine learning and statistical approaches such as logistic regression and tree-based algorithms have been used individually for credit scoring models. Newer contemporary machine learning techniques can outperform classic methods by simply combining models. This dissertation intends to be an empirical study on a publicly available bank loan dataset to study banking loan default, using ensemble-based techniques to increase model robustness and predictive power. The proposed ensemble method is based on stacking generalization an extension of various preceding studies that used different techniques to further enhance the model predictive capabilities. The results show that combining different models provides a great deal of flexibility to credit scoring models

Application of data analytics for predictive maintenance in aerospace: an approach to imbalanced learning.

The use of aircraft operational logs to predict potential failure that may lead to disruption poses many challenges and has yet to be fully explored. These logs are captured during each flight and contain streamed data from various aircraft subsystems relating to status and warning indicators. They may, therefore, be regarded as complex multivariate time-series data. Given that aircraft are high-integrity assets, failures are extremely rare, and hence the distribution of relevant data containing prior indicators will be highly skewed to the normal (healthy) case. This will present a significant challenge in using data-driven techniques to 'learning' relationships/patterns that depict fault scenarios since the model will be biased to the heavily weighted no-fault outcomes. This thesis aims to develop a predictive model for aircraft component failure utilising data from the aircraft central maintenance system (ACMS). The initial objective is to determine the suitability of the ACMS data for predictive maintenance modelling. An exploratory analysis of the data revealed several inherent irregularities, including an extreme data imbalance problem, irregular patterns and trends, class overlapping, and small class disjunct, all of which are significant drawbacks for traditional machine learning algorithms, resulting in low-performance models. Four novel advanced imbalanced classification techniques are developed to handle the identified data irregularities. The first algorithm focuses on pattern extraction and uses bootstrapping to oversample the minority class; the second algorithm employs the balanced calibrated hybrid ensemble technique to overcome class overlapping and small class disjunct; the third algorithm uses a derived loss function and new network architecture to handle extremely imbalanced ratios in deep neural networks; and finally, a deep reinforcement learning approach for imbalanced classification problems in log- based datasets is developed. An ACMS dataset and its accompanying maintenance records were used to validate the proposed algorithms. The research's overall finding indicates that an advanced method for handling extremely imbalanced problems using the log-based ACMS datasets is viable for developing robust data-driven predictive maintenance models for aircraft component failure. When the four implementations were compared, deep reinforcement learning (DRL) strategies, specifically the proposed double deep State-action-reward-state-action with prioritised experience reply memory (DDSARSA+PER), outperformed other methods in terms of false-positive and false-negative rates for all the components considered. The validation result further suggests that the DDSARSA+PER model is capable of predicting around 90% of aircraft component replacements with a 0.005 false-negative rate in both A330 and A320 aircraft families studied in this researchPhD in Transport System