Bayesian ML for trading
Now that we are familiar with the Bayesian approach to ML and probabilistic programming with PyMC3, let's explore a few relevant trading-related applications, namely:
- Modeling the Sharpe ratio as a probabilistic model for more insightful performance comparison
- Computing pairs trading hedge ratios using Bayesian linear regression
- Analyzing linear time series models from a Bayesian perspective
Thomas Wiecki, one of the main PyMC3 authors who also leads Data Science at Quantopian, has created several examples that the following sections follow and build on. The PyMC3 documentation has many additional tutorials (see GitHub for links).
Bayesian Sharpe ratio for performance comparison
In this section, we will illustrate:
- How to define the Sharpe Ratio (SR) as a probabilistic model using PyMC3
- How to compare its posterior distributions for different return series
