2019

BIG DATA ANALYTICS

DIGITAL ASSIGNMENT II
THE BIG DATA ANALYTICS USED IN MACHINE
LEARNING TECHNIQUES IN FINANACIAL ANALYSIS

A.P.SRINIVASAN
18MBA0062
21-Mar-19
INTRODUCTION:

Machine learning is making significant inroads in the financial services industry. Let’s see why financial
companies should care, what solutions they can implement with AI and machine learning, and how exactly
they can apply this technology.

Characteristics of Machine Learning in Finance

As our human brain limits our thinking to a certain number as compared to that of machines. We can
at maximum concentrate only on 3-4 things at the same time, whereas machines can concentrate on
several thousand. Some of the reasons why we should use machine learning in Finance are:

Reliability:
When it comes to handling finance, establishing trust on the person is essential. Banks, investment firms,
stock markets do not transact a few dollars every day. They transact in high quantities like billions of
dollars. Hence, it is imperative that we have trust in the firm or person handling it. As people can be
biased and selfish, some people tend to do fraud with the money they are handling. In order to cope with
these issues, machines embedded with ML are corruption free and complete the requests provided.

Speed:
We all know it is very difficult to trade stocks in the stock market. People usually carry out a lot of
analysis from historical data, plot graphs, and use formulas to predict the future of the stocks. Some just
randomly place bets against the market. All this looks and sounds awfully hectic and is very time-
consuming. Machine Learning algorithms are able to provide accurate in-depth analysis of thousands of
datasets. And also give concise and accurate predictions within a fraction of a time. It helps alleviate the
hassles of going through big data and making sense of what it means.

Security:
With the recent hit of WannaCry ransomware attack all across the world, it has become clear that we are
still prone to hacking and cyber security theft. Machine Learning categorizes its data over three
categories. Then builds models which are an essential step in predicting the fraud or anomaly in the data
sets. Whereas manual reviewing is costly, time-consuming and leads to high false negatives which are
unacceptable in the financial industry.
Accuracy:
People do not have the ability or do not like doing the samemundane task repetitively. And if they do, it is
followed by many errors. Moreover, machines can perform repetitive tasks for an infinite amount of time.
ML algorithms do the dirty work of data analysis and only escalate decisions to humans when their input
adds insights. ML are often more effective than humans at detecting subtle or non-intuitive patterns to
identify fraudulent transactions. Also, unsupervised ML models can continuously analyze and process
new data and then autonomously update its models to reflect the latest trends.

to use Machine Learning in credit scoring

Very often we see multinational corporations defaulting on payment of their debt to the banks. Even after
being extremely careful and verifying the credibility of the corporations, this seems to be a very common
problem in the financial sector. Some financial institutes use scoring models to lower credit risk in credit
appraisals, and in the granting and supervision of credit. Credit scoring models based on classical
statistical theories are widely used. However, these models are less resilient when it comes to large
amounts of data input. And as a consequence, some of the assumptions made in the classical statistics
analysis fail to hold true. This, in turn, influences the accuracy of prediction.

Identifying the credit risk score of customers based on their nationality, occupation, salary, experience,
industry working in, credit history etc is very critical to the banks. All this even before providing any
service to the customers. This is an important Key Performance Index (KPI) for the banks before
providing credit or any other products related to finance.

Introducing a central, integrated finance & risk mechanism which can be ‘instantly’ used for a customer is
a major challenge these days. Even now, banks fail to produce an instant loan approval due to their
inability to predict the risk score of a customer. ML could fasten the process of granting credit to
customers and avoid the due diligence required that eats a lot of time.

To identify the credit score of the customer, we make use of regression algorithms. These algorithms use
a statistical process for estimating the relationships among variables. Regression analysis helps
understand how the typical value of the dependent variable changes when any of the independent
variables is varied while having the independent variables fixed. These algorithms are widely used in
forecasting and prediction, where its use has been accelerated with the field of machine learning.

The first step in this approach is defining the population, i.e., the availability of credit history of the
customers. Then selecting the people at whom this is aimed and defining the benchmark for satisfactory
and unsatisfactory performance. This part would serve as the base dataset for the regression algorithm to
start its operation.

In the next step we select the sample, for which the following criteria are applied:
1. Identifying variables available in companies system
2. Defining the period of interest and sample size
3. Validating the consistency and completeness of the data
Among the possible pieces of information selected, also called demographic variables are gender, age,
profession, company, education, marital status etc. We generally suggest that the clients in the sample be
for a period of 12-18 months. This amount of time is sufficient to check for delays in payments and
defaults. And then we consolidate the payment behavior of a good client.

Now we begin carrying out a preliminary analysis by choosing variables to put into the modeling,
grouping attributes of variables and creating dummy variables. By using contingency tables, a calculation
is made of the relative risk (RR) associated with the levels of the independent variables. Done by dividing
the percentage of good clients by the percentage of bad ones for each level. The more the percentages of
good and bad clients differ for the levels of a single variable, the greater the usefulness of this variable for
the prognosis of future performance. Generally, the RR lies between 0 and 2 while 0 being Extremely
Poor and 2 being Excellent.

Levels classified as neutral are not used in the analysis since they are not greatly different from the good
and bad groups.
The construction of the model comprises of choosing the multivariate statistical technique. Then
determining the software to be used, selecting the independent variables and checking assumptions of the
techniques. Once the data has been reduced to cluster levels we use the discriminant analysis, logistic
regression and neural networks. Discriminant analysis and logistic regression are statistical techniques
that take different approaches. Resulting in the possibility of which one of these techniques succeeding
when the other fails. Neural networks are part of the process as it has the ability to deal with nonlinear
and discontinuous effects. The software to be used should be checked regarding analysis to be performed
and easiness of use.
Finally, in order to evaluate the performance measures, we find the KS test for two samples. The KS test
has the characteristic of simplicity. What we are looking for is the difference between two clusters i.e
good payers and bad payers translated by their respective result forecast. The differences between the
distributions of good and bad payers for each forecast are determined. And the value of the KS test is the
greatest of these differences in the module. As the final result obtained from the model is usually a scale
from 0-1, a client is defined as a poor payer when the result is less than 0.5; otherwise, he/she will be
classified as a good payer.
Some other advantages of Machine Learning are
Detecting Fraud:
Ref – https://www.fairwinds.org/inside-fairwinds/fraud-protection-center/report-fraud.html

Fraud detection process using machine learning starts with gathering and segmenting the data into three
different segments. Then machine learning model is fed with training sets to predict the probability of
fraud. These datasets are found from historical data. Lastly, we build models as an essential step in
predicting the fraud or anomaly in the data sets. The detection of fraud now takes up much less time as
compared to traditional detection. Since the use of machine learning is still small and growing it will in a
few years evolve a lot more and be able to detect complex frauds.
Stock Market Prediction:

Ref – http://updatedigital.at/news/marketing/iab-impulse-zum-thema-real-time-advertising/73.255

All of us have heard of people become billionaires through trading stocks. But it is very tough to beat the
market without having sound knowledge of how it works and the current trends. Well, now with the use
of machine learning stock prediction has become fairly simple. These machine learning algorithms make
use of historical data about the company like balance sheets, profit and loss statements etc. And finally,
analyze them to find out meaningful signs regarding the future of the company. Further, the algorithm can
also hunt for news about the company. And learn from sources around the world regarding how the
market feels about the company. Also, with natural language processing, it can scan through the news
channels and video libraries of social media to find more data about the company. As this technology is
still developing and not accurate enough. It is safe to say that in the near future it will be able to make
very accurate predictions of the stock market.
Treasury – CRM, Spot Transactions:

CRM is very prominent in Retail Banking Space. When it comes to Treasury space within banking,
customer relationship management hardly exists. Treasury has a diverse product palette such as FX,
Options, Swaps, Forwards and more importantly Spots. Having an online transaction by combining
product sophistication of these, risk aspects of customer, market and economy behavior and credit history
is almost a distant dream for banks.

Chatbot – Your personal Financial Assistant:

Ref – http://www.asktrim.com/

Chatbot can be programmed as a Financial Advisor. A finance bot can be your personal financial guide
giving you advice on anything from investing your money in properties to buying a new car. This bot can
be a life-saver and the first step to organizing your life. A finance bot can also turn complex finance
terminology into layman’s language, saving your time and reducing your pain. It could help you track
your expenses and help you save money. Kasisto’s AI platform is going to power a mobile-only bank in
India, where all kind of customer requests will be handled by Chatbots.

Tasks such as Customer Alert, Money Transfer, Deposits checks, Inquiries, FAQs and search, Content
Delivery Channel, Customer Support, offers, etc can be easily achieved by banking bots. It can provide a
running tally of the potential savings that you are accruing by documenting your deductible expenses. Tax
Bots can also provide Tax tips, it can be integrated with your banks, and what not.

In conclusion,
although machine learning is a newer technology there are lots of academicians and industry experts
among which machine learning is very popular. It is safe to say that there are a lot more innovation
coming in this field. And adopting Machine Learning also has its own setbacks due to data sensitivity,
infrastructure requirements, the flexibility of business models etc. But the advantages outweigh the
drawbacks and help solve lots of problems with Machine Learning.

Since machine learning techniques are far more secure and safer than human practices, it is the best
choice for finance. It would help provide opportunities to banks and other financial institutions by helping
them avoid huge losses caused due to defaults. Finance is a very critical matter in all the countries around
of the world, and safeguarding them against threats and improving its operations would help all grow and
prosper faster.