Python for Finance - Second Edition

By Yuxing Yan

About This Book

• Understand the fundamentals of Python data structures and work with time-series data
• Implement key concepts in quantitative finance using popular Python libraries such as NumPy, SciPy, and matplotlib
• A step-by-step tutorial packed with many Python programs that will help you learn how to apply Python to finance

Who This Book Is For

This book assumes that the readers have some basic knowledge related to Python. However, he/she has no knowledge of quantitative finance. In addition, he/she has no knowledge about financial data.

• Language: English
• Publisher: Packt Publishing
• Release date: Jun 30, 2017
• ISBN: 9781787125025

Book preview

Table of Contents

Python for Finance Second Edition

Credits

About the Author

About the Reviewers

www.PacktPub.com

eBooks, discount offers, and more

Why subscribe?

Customer Feedback

Preface

A few words for the second edition

Why Python?

A programming book written by a finance professor

What this book covers

Small-program oriented

Using real-world data

What you need for this book

Who this book is for

Conventions

Reader feedback

Customer support

Downloading the example code

Errata

Piracy

Questions

1. Python Basics

Python installation

Installation of Python via Anaconda

Launching Python via Spyder

Direct installation of Python

Variable assignment, empty space, and writing our own programs

Writing a Python function

Python loops

Python loops, if...else conditions

Data input

Data manipulation

Data output

Exercises

Summary

2. Introduction to Python Modules

What is a Python module?

Introduction to NumPy

Introduction to SciPy

Introduction to matplotlib

How to install matplotlib

Several graphical presentations using matplotlib

Introduction to statsmodels

Introduction to pandas

Python modules related to finance

Introduction to the pandas_reader module

Two financial calculators

How to install a Python module

Module dependency

Exercises

Summary

3. Time Value of Money

Introduction to time value of money

Writing a financial calculator in Python

Definition of NPV and NPV rule

Definition of IRR and IRR rule

Definition of payback period and payback period rule

Writing your own financial calculator in Python

Two general formulae for many functions

Appendix A – Installation of Python, NumPy, and SciPy

Appendix B – visual presentation of time value of money

Appendix C – Derivation of present value of annuity from present value of one future cash flow and present value of perpetuity

Appendix D – How to download a free financial calculat

Appendix E – The graphical presentation of the relationship between NPV and R

Appendix F – graphical presentation of NPV profile with two IRRs

Appendix G – Writing your own financial calculator in Python

Exercises

Summary

4. Sources of Data

Diving into deeper concepts

Retrieving data from Yahoo!Finance

Retrieving data from Google Finance

Retrieving data from FRED

Retrieving data from Prof. French's data library

Retrieving data from the Census Bureau, Treasury, and BLS

Generating two dozen datasets

Several datasets related to CRSP and Compustat

Appendix A – Python program for return distribution versus a normal distribution

Appendix B – Python program to a draw candle-stick picture

Appendix C – Python program for price movement

Appendix D – Python program to show a picture of a stock's intra-day movement

Appendix E –properties for a pandas DataFrame

Appendix F –how to generate a Python dataset with an extension of .pkl or .pickle

Appendix G – data case #1 -generating several Python datasets

Exercises

Summary

5. Bond and Stock Valuation

Introduction to interest rates

Term structure of interest rates

Bond evaluation

Stock valuation

A new data type – dictionary

Appendix A – simple interest rate versus compounding interest rate

Appendix B – several Python functions related to interest conversion

Appendix C – Python program for rateYan.py

Appendix D – Python program to estimate stock price based on an n-period model

Appendix E – Python program to estimate the duration for a bond

Appendix F – data case #2 – fund raised from a new bond issue

Summary

6. Capital Asset Pricing Model

Introduction to CAPM

Moving beta

Adjusted beta

Scholes and William adjusted beta

Extracting output data

Outputting data to text files

Saving our data to a .csv file

Saving our data to an Excel file

Saving our data to a pickle dataset

Saving our data to a binary file

Reading data from a binary file

Simple string manipulation

Python via Canopy

References

Exercises

Summary

7. Multifactor Models and Performance Measures

Introduction to the Fama-French three-factor model

Fama-French three-factor model

Fama-French-Carhart four-factor model and Fama-French five-factor model

Implementation of Dimson (1979) adjustment for beta

Performance measures

How to merge different datasets

Appendix A – list of related Python datasets

Appendix B – Python program to generate ffMonthly.pkl

Appendix C – Python program for Sharpe ratio

Appendix D – data case #4 – which model is the best, CAPM, FF3, FFC4, or FF5, or others?

References

Exercises

Summary

8. Time-Series Analysis

Introduction to time-series analysis

Merging datasets based on a date variable

Using pandas.date_range() to generate one dimensional time-series

Return estimation

Converting daily returns to monthly ones

Merging datasets by date

Understanding the interpolation technique

Merging data with different frequencies

Tests of normality

Estimating fat tails

T-test and F-test

Tests of equal variances

Testing the January effect

52-week high and low trading strategy

Estimating Roll's spread

Estimating Amihud's illiquidity

Estimating Pastor and Stambaugh (2003) liquidity measure

Fama-MacBeth regression

Durbin-Watson

Python for high-frequency data

Spread estimated based on high-frequency data

Introduction to CRSP

References

Appendix A – Python program to generate GDP dataset usGDPquarterly2.pkl

Appendix B – critical values of F for the 0.05 significance level

Appendix C – data case #4 - which political party manages the economy better?

Exercises

Summary

9. Portfolio Theory

Introduction to portfolio theory

A 2-stock portfolio

Optimization – minimization

Forming an n-stock portfolio

Constructing an optimal portfolio

Constructing an efficient frontier with n stocks

References

Appendix A – data case #5 - which industry portfolio do you prefer?

Appendix B – data case #6 - replicate S&P500 monthly returns

Exercises

Summary

10. Options and Futures

Introducing futures

Payoff and profit/loss functions for call and put options

European versus American options

Understanding cash flows, types of options, rights and obligations

Black-Scholes-Merton option model on non-dividend paying stocks

Generating our own module p4f

European options with known dividends

Various trading strategies

Covered-call – long a stock and short a call

Straddle – buy a call and a put with the same exercise prices

Butterfly with calls

The relationship between input values and option values

Greeks

Put-call parity and its graphic presentation

The put-call ratio for a short period with a trend

Binomial tree and its graphic presentation

Binomial tree (CRR) method for European options

Binomial tree (CRR) method for American options

Hedging strategies

Implied volatility

Binary-search

Retrieving option data from Yahoo! Finance

Volatility smile and skewness

References

Appendix A – data case 6: portfolio insurance

Exercises

Summary

11. Value at Risk

Introduction to VaR

Normality tests

Skewness and kurtosis

Modified VaR

VaR based on sorted historical returns

Simulation and VaR

VaR for portfolios

Backtesting and stress testing

Expected shortfall

Appendix A – data case 7 – VaR estimation for individual stocks and a portfolio

References

Exercises

Summary

12. Monte Carlo Simulation

Importance of Monte Carlo Simulation

Generating random numbers from a standard normal distribution

Drawing random samples from a normal distribution

Generating random numbers with a seed

Random numbers from a normal distribution

Histogram for a normal distribution

Graphical presentation of a lognormal distribution

Generating random numbers from a uniform distribution

Using simulation to estimate the pi value

Generating random numbers from a Poisson distribution

Selecting m stocks randomly from n given stocks

With/without replacements

Distribution of annual returns

Simulation of stock price movements

Graphical presentation of stock prices at options' maturity dates

Replicating a Black-Scholes-Merton call using simulation

Exotic option #1 – using the Monte Carlo Simulation to price average

Exotic option #2 – pricing barrier options using the Monte Carlo Simulation

Liking two methods for VaR using simulation

Capital budgeting with Monte Carlo Simulation

Python SimPy module

Comparison between two social policies – basic income and basic job

Finding an efficient frontier based on two stocks by using simulation

Constructing an efficient frontier with n stocks

Long-term return forecasting

Efficiency, Quasi-Monte Carlo, and Sobol sequences

Appendix A – data case #8 - Monte Carlo Simulation and blackjack

References

Exercises

Summary

13. Credit Risk Analysis

Introduction to credit risk analysis

Credit rating

Credit spread

YIELD of AAA-rated bond, Altman Z-score

Using the KMV model to estimate the market value of total assets and its volatility

Term structure of interest rate

Distance to default

Credit default swap

Appendix A – data case #8 - predicting bankruptcy by using Z-score

References

Exercises

Summary

14. Exotic Options

European, American, and Bermuda options

Chooser options

Shout options

Binary options

Rainbow options

Pricing average options

Pricing barrier options

Barrier in-and-out parity

Graph of up-and-out and up-and-in parity

Pricing lookback options with floating strikes

Appendix A – data case 7 – hedging crude oil

References

Exercises

Summary

15. Volatility, Implied Volatility, ARCH, and GARCH

Conventional volatility measure – standard deviation

Tests of normality

Estimating fat tails

Lower partial standard deviation and Sortino ratio

Test of equivalency of volatility over two periods

Test of heteroskedasticity, Breusch, and Pagan

Volatility smile and skewness

Graphical presentation of volatility clustering

The ARCH model

Simulating an ARCH (1) process

The GARCH model

Simulating a GARCH process

Simulating a GARCH (p,q) process using modified garchSim()

GJR_GARCH by Glosten, Jagannanthan, and Runkle

References

Appendix A – data case 8 - portfolio hedging using VIX calls

References

Appendix B – data case 8 - volatility smile and its implications

Exercises

Summary

Index

Python for Finance Second Edition

---

Python for Finance Second Edition

Copyright © 2017 Packt Publishing

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Second edition: June 2017

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Credits

Author

Yuxing Yan

Reviewers

Dr. Param Jeet

Nabih Ibrahim Bawazir, M.Sc.

Joran Beasley

Commissioning Editor

Amey Varangaonkar

Acquisition Editor

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Cover Work

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About the Author

Yuxing Yan graduated from McGill University with a PhD in finance. Over the years, he has been teaching various finance courses at eight universities: McGill University and Wilfrid Laurier University (in Canada), Nanyang Technological University (in Singapore), Loyola University of Maryland, UMUC, Hofstra University, University at Buffalo, and Canisius College (in the US).

His research and teaching areas include: market microstructure, open-source finance and financial data analytics. He has 22 publications including papers published in the Journal of Accounting and Finance, Journal of Banking and Finance, Journal of Empirical Finance, Real Estate Review, Pacific Basin Finance Journal, Applied Financial Economics, and Annals of Operations Research.

He is good at several computer languages, such as SAS, R, Python, Matlab, and C.

His four books are related to applying two pieces of open-source software to finance: Python for Finance (2014), Python for Finance (2nd ed., expected 2017), Python for Finance (Chinese version, expected 2017), and Financial Modeling Using R (2016).

In addition, he is an expert on data, especially on financial databases. From 2003 to 2010, he worked at Wharton School as a consultant, helping researchers with their programs and data issues. In 2007, he published a book titled Financial Databases (with S.W. Zhu). This book is written in Chinese.

Currently, he is writing a new book called Financial Modeling Using Excel — in an R-Assisted Learning Environment. The phrase R-Assisted distinguishes it from other similar books related to Excel and financial modeling. New features include using a huge amount of public data related to economics, finance, and accounting; an efficient way to retrieve data: 3 seconds for each time series; a free financial calculator, showing 50 financial formulas instantly, 300 websites, 100 YouTube videos, 80 references, paperless for homework, midterms, and final exams; easy to extend for instructors; and especially, no need to learn R.

I would like to thank Ben Amoako-Adu, Brian Smith (who taught me the first two finance courses and offered unstinting support for many years after my graduation), George Athanassakos (one of his assignments forced me to learn C), and Jin-Chun Duan.

I would also like to thank Wei-Hung Mao, Jerome Detemple, Bill Sealey, Chris Jacobs, Mo Chaudhury, Summon Mazumdar (my former professors at McGill), and Lawrence Kryzanowski. (His wonderful teaching inspired me to concentrate on empirical finance and he edited my doctoral thesis word by word even though he was not my supervisor!). There is no doubt that my experience at Wharton has shaped my thinking and enhanced my skill sets. I thank Chris Schull and Michael Boldin for offering me the job; Mark Keintz, Dong Xu, Steven Crispi, and Dave Robinson, my former colleagues, who helped me greatly during my first two years at Wharton; and Eric Zhu, Paul Ratnaraj, Premal Vora, Shuguang Zhang, Michelle Duan, Nicholle Mcniece, Russ Ney, Robin Nussbaum-Gold, and Mireia Gine for all their help. In addition, I'd like to thank Shaobo Ji, Tong Yu, Shaoming Huang, Xing Zhang.

About the Reviewers

Dr. Param Jeet has a Ph.D. in mathematics from one of India's leading engineering institutes, IIT Madras. Dr. Param Jeet has a decade of experience in the data analytics industry. He started his career with Bank of America and since then worked with a few companies as a data scientist. He has also worked across domains such as capital market, education, telecommunication and healthcare. Dr. Param Jeet has expertise in Quantitative finance, Data analytics, machine learning, R, Python, Matlab, SQL, and big data technologies. He has also published a few research papers in reputed international journals, published and reviewed books, and has worked on Learning Quantitative Finance with R.

Nabih Ibrahim Bawazir, M.Sc. is a data scientist at an Indonesian financial technology start-up backed by Digital Alpha Group, Pte Ltd., Singapore. Most of his work is research on the development phase, from financial modeling to data-driven underwriting. Previously, he worked as actuary in CIGNA. He holds M.Sc in Financial Mathematics from Gadjah Mada University, Indonesia.

Joran Beasley received his degree in computer science from the University of Idaho. He works has been programming desktop applications in wxPython professionally for monitoring large scale sensor networks for use in agriculture for the last 7 years. He currently lives in Moscow Idaho, and works at Decagon Devices Inc. as a software engineer.

I would like to thank my wife Nicole, for putting up with my long hours hunched over a keyboard, and her constant support and help in raising our two wonderful children.

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Preface

It is our firm belief that an ambitious student major in finance should learn at least one computer language. The basic reason is that we have entered a so-called big data era. In finance, we have a huge amount of data, and most of it is publically available free of charge. To use such rich sources of data efficiently, we need a tool. Among many potential candidates, Python is one of the best choices.

A few words for the second edition

For the second edition, we have reorganized the structure of the book by adding more chapters related to finance. This is recognition and response to the feedbacks from numerous readers. For the second edition, the first two chapters are exclusively devoted to Python. After that, all remaining chapters are associated with finance. Again, Python in this book is used as a tool to help readers learn and understand financial theories better. To meet the demand of using all types of data by various quantitative programs, business analytics programs and financial engineering programs, we add Chapter 4, Sources of Data. Because of this restructuring, this edition is more suitable for a one-semester course such as Quantitative Finance, Financial Analysis using Python and Business Analytics. Two finance professors, Premal P. Vora, at Penn State University, Sheng Xiao, at Westminister College, have adopted the first edition as their textbook. Hopefully, more finance, accounting professors would find the second edition is more suitable for their students, especially for those students from a financial engineering program, business analytics and other quantitative areas.

Why Python?

There are various reasons that Python should be used. Firstly, Python is free in terms of license. Python is available for all major operating systems, such as Windows, Linux/Unix, OS/2, Mac, and Amiga, among others. Being free has many benefits. When students graduate, they could apply what they have learned wherever they go. This is true for the financial community as well. In contrast, this is not true for SAS and MATLAB. Secondly, Python is powerful, flexible, and easy to learn. It is capable of solving almost all our financial and economic estimations. Thirdly, we could apply Python to big data. Dasgupta (2013) argues that R and Python are two of the most popular open source programming languages for data analysis. Fourthly, there are many useful modules in Python. Each model is developed for a special purpose. In this book, we focus on NumPy, SciPy, Matplotlib, Statsmodels, and Pandas modules.

A programming book written by a finance professor

There is no doubt that the majority of programming books are written by professors from computer science. It seems odd that a finance professor writes a programming book. It is understandable that the focus would be quite different. If an instructor from computer science were writing this book, naturally the focus would be Python, whereas the true focus should be finance. This should be obvious from the title of the book Python for Finance. This book intends to change the fact that many programming books serving the finance community have too much for the language itself and too little for finance. Another unique feature of the book is that it uses a huge amount public data related to economics, finance and accounting, see Chapter 4, Sources of Data for more details.

What this book covers

Chapter 1, Python Basics, offers a short introduction, and explains how to install Python, how to launch and quit Python, variable assignment, vector, matrix and Tuple, calling embedded functions, write your own functions, input data from an input file, simple data manipulations, output our data and results, and generate a Python dataset with an extension of pickle.

Chapter 2, Introduction to Python Modules, discusses the meaning of a module, how to import a module, show all functions contained in an imported module, adopt a short name for an imported module, compare between import math and from math import, delete an imported module, import just a few functions from a module, introduction to NumPy, SciPy, matplotlib, statsmodels, pandas and Pandas_reader, find out all built-in modules and all available (preinstalled) modules, how to find a specific uninstalled module.

Chapter 3, Time Value of Money, introduces and discusses various basic concepts and formulae associated with finance, such as present value of one future cash flow, present value of (growing) perpetuity, present and future value of annuity, perpetuity vs. perpetuity due, annuity vs. annuity due, relevant functions contained in SciPy and numpy.lib.financial submodule, a free financial calculator, written in Python, definition of NPV (Net Present Value) and its related rule, definition of IRR (Internal Rate of Return) and its related rule, Python graphical presentation of time value of money, and NPV profile.

Chapter 4, Sources of Data, discusses how to retrieve data from various public sources, such as Yahoo!Finance, Google finance, FRED (Federal Reserve Bank's Economics Data Library), Prof. French's Data Library, BLS (Bureau of Labor Statistics) and Census Bureau. In addition, it would discuss various methods to input data, such as files with formats of csv, txt, pkl, Matlab, SAS or Excel.

Chapter 5, Bond and Stock Valuation, introduces interest rate and its related concepts, such as APR (Annual Percentage Rate), EAR (Effective Annual Rate), compounding frequency, how to convert one effective rate to another one, the term structure of interest rate, how to estimate the selling price of a regular bond, how to use the so-called discount dividend model to estimate the price of a stock and so on.

Chapter 6, Capital Asset Pricing Model, shows how to download data from Yahoo!Finance in order to run a linear regression for CAPM, rolling beta, several Python programs to estimate beta for multiple stocks, adjusted beta and portfolio beat estimation, two beta adjustment methods by Scholes and Williams (1977) Dimson (1979).

Chapter 7, Multifactor Models and Performance Measures, shows how to extend the single-factor model, described in Chapter 6, Capital Asset Pricing Model, to multifactor and complex models such as the Fama-French three-factor model, the Fama-French-Carhart four-factor model, and the Fama-French five-factor model, and performance measures such as the Sharpe ratio, Treynor ratios, Sortino ratio, and Jensen's alpha.

Chapter 8, Time-Series Analysis, shows how to design a good date variable, merge datasets by this date variable, normal distribution, normality tests, term structure of interest rate, 52-week high and low trading strategy, return estimation, convert daily returns to monthly or annual returns, T-test, F-test, Durbin-Watson test for autocorrelation, Fama-MacBeth regression, Roll (1984) spread, Amihud's (2002) illiquidity, Pastor and Stambaugh's (2003) liquidity measure, January effect, weekday effect, retrieving high-frequency data from Google Finance and from Prof. Hasbrouck's TORQ database (Trade, Order, Report and Quotation) and introduction to CRSP (Center for Research in Security Prices) database.

Chapter 9, Portfolio Theory, discusses mean and risk estimation of a 2-stock portfolio, N-stock portfolio, correlation vs. diversification effect, how to generate a return matrix, generating an optimal portfolio based on the Sharpe ratio, the Treynor ratio and the Sortinor ratio; how to construct an efficient frontier; Modigliani and Modigliani performance measure (M2 measure); and how to estimate portfolio returns using value-weighted and equal-weighed methodologies.

Chapter 10, Options and Futures, discusses payoff and profit/loss functions for calls and puts and their graphical representations, European versus American options; normal distribution; standard normal distribution; cumulative normal distribution; the famous Black-Scholes-Merton option model with/without dividend; various trading strategies and their visual presentations, such as covered call, straddle, butterfly, and calendar spread; Greeks; the put-call parity and its graphical representation; a graphical representation of a one-step and a two-step binomial tree model; how to use the binomial tree method to price both European and American options; and implied volatility, volatility smile, and skewness.

Chapter 11, Value at Risk, first reviews the density and cumulative functions of a normal distribution, then discusses the first method to estimate VaR based on the normality assumption, conversion from one day risk to n-day risk, one-day VaR to n-day VaR, normality tests, impact of skewness and kurtosis, modifying the VaR measure by including both skewness and kurtosis, the second method to estimate VaR based on historical returns, how to link two methods by using Monte Carlo simulation, back testing, and stress testing.

Chapter 12, Monte Carlo Simulation, discusses how to estimate the π value by using Monte Carlo simulation; simulating stock price movement with a lognormal distribution; constructing efficient portfolios and an efficient frontier; replicating the Black-Scholes-Merton option model by simulation; pricing several exotic options, such as lookback options with floating strikes; bootstrapping with/without replacements; long term expected return forecast and a related efficiency, quasi Monte Carlo simulation, and Sobol sequence.

Chapter 13, Credit Risk Analysis, discusses Moody's, Standard & Poor's, and Fitch's credit ratings, credit spread, 1-year and 5-year migration matrices, term structure of interest rate, Altman's Z-score to predict corporate bankruptcy, the KMV model to estimate total assets and its volatility, default probability and distance to default, and credit default swap.

Chapter 14, Exotic Options, first compares European and American options we learned about in Chapter 9, Portfolio Theory with Bermudan options, then discusses methods to price simple chooser options; shout, rainbow, and binary options; the average price option; barrier options such as the up-and-in option and the up-and-out option; and barrier options such as down-and-in and down-and-out options.

Chapter 15, Volatility, Implied Volatility, ARCH, and GARCH, focuses on two issues: volatility measures and ARCH/GARCH.

Small-program oriented

Based on the author's teaching experience at seven schools, McGill and Wilfrid Laurier University (in Canada), NTU (in Singapore), and Loyola University, Maryland, UMUC, Hofstra University, and Canisius College (in the United States), and his eight-year consulting experience at Wharton School, he knows that many finance students like small programs that solve one specific task. Most programming books offer just a few complete and complex programs. The number of programs is far too less than enough few. There are two side effects to such an approach. First, finance students are drowned in programming details, get intimidated, and eventually lose interest in learning a computer language. Second, they don't learn how to apply what they just learned, such as running a capital asset pricing model (CAPM) to estimate IBM's beta from 1990 to 2013. This book offers about 300 complete Python programs around many finance topics.

Using real-world data

Another shortcoming of the majority of books for programming is that they use hypothetical data. In this book, we use real-world data for various financial topics. For example, instead of showing how to run CAPM to estimate the beta (market risk), I show you how to estimate IBM's, Apple's, or Walmart's betas. Rather than just presenting formulae that shows you how to estimate a portfolio's return and risk, the Python programs are given to download real-world data, form various portfolios, and then estimate their returns and risk, including Value at Risk (VaR). When I was a doctoral student, I learned the basic concept of volatility smiles. However, until writing this book, I had a chance to download real-world data to draw IBM's volatility smile.

What you need for this book

Here, we use several concrete examples to show what a reader could achieve after going through this book carefully.

First, after reading the first two chapters, a reader/student should be able to use Python to calculate the present value, future value, present value of annuity, IRR (internal rate of return), and many other financial formulae. In other words, we could use Python as a free ordinary calculator to solve many finance problems. Second, after the first three chapters, a reader/student or a finance instructor could build a free financial calculator, that is, combine a few dozen small Python programs into a big Python program. This big program behaves just like any other module written by others. Third, readers learn how to write Python programs to download and process financial data from various public data sources, such as Yahoo! Finance, Google Finance, Federal Reserve Data Library, and Prof. French's Data Library.

Fourth, readers will understand basic concepts associated with modules, which are packages written by experts, other users, or us, for specific purposes. Fifth, after understanding the Matplotlib module, readers can produce various graphs. For instance, readers could use graphs to demonstrate payoff/profit outcomes based on various trading strategies by combining the underlying stocks and options. Sixth, readers will be able to download IBM's daily price, the S&P 500 index price, and data from Yahoo! Finance and estimate its market risk (beta) by applying CAPM. They will also be able to form a portfolio with different securities, such as risk-free assets, bonds, and stocks. Then, they can optimize their portfolios by applying Markowitz's mean-variance model. In addition, readers will know how to estimate the VaR of their portfolios.

Seventh, a reader should be able to price European and American options by applying both the Black-Scholes-Merton option model for European options only, and the Monte Carlo simulation for both European and American options. Last but not least, readers will learn several ways to measure volatility. In particular, they will learn how to use AutoRegressive Conditional Heteroskedasticity (ARCH) and Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models.

Who this book is for

If you are a graduate student majoring in finance, especially studying computational finance, financial modeling, financial engineering, or business analytics, this book will benefit you greatly. Here are two examples: Prof. Premal P. Vora at Penn State University has used this book for his course titled Data Science in Finance, and Prof. Sheng Xiao at Westminister College has done so for his course titled Financial Analytics. If you are a professional, you could learn Python and use it in many financial projects. If you are an individual investor, you could benefit from reading this book as well.

Conventions

In this book, you will find a number of styles of text that distinguish between different kinds of information. Here are some examples of these styles, and an explanation of their meaning.

Code words in text, database table names, folder names, filenames, file extensions, pathnames, dummy URLs, user input, and Twitter handles are shown as follows: The sqrt(), square root, function is contained in the math module.

A block of code is set as follows:

>>>sqrt(2)

NameError: name 'sqrt' is not defined

>>> Traceback (most recent call last):

  File , line 1, in

math.sqrt(2)

1.4142135623730951

>>>

Any command-line input or output is written as follows:

help(pv_f)

New terms and important words are shown in bold. Words that you see on the screen, in menus or dialog boxes for example, appear in the text like this: To write a Python program, we click File, then New File.

Note

Warnings or important notes appear in a box like this.

Tip

Tips and tricks appear like this.

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Chapter 1. Python Basics

In this chapter, we will discuss basic concepts and several widely used functions related to Python. This chapter plus the next one (Chapter 2, Introduction to Python Modules) are only the chapters exclusively based on Python techniques. Those two chapters serve as a review for readers who have some basic Python knowledge. There is no way that a beginner, with no prior Python knowledge, could master Python by reading just those two chapters. For a new learner who wants to learn Python in more detail, he/she could find many good books. From Chapter 3, Time Value of Money onward, we will use Python, which will help in explaining or demonstrating various finance concepts, running regression, and processing data related to economics, finance, and accounting. Because of this, we will offer more Python-related techniques and usages in each of the upcoming chapters.

In particular, in this chapter, we will discuss the following topics:

Python installation

Variable assignment, empty space, and writing our own programs

Writing a Python function

Data input

Data manipulation

Data output

Python installation

In this section, we will discuss how to install Python. More specifically, we will discuss two methods: installing Python via Anaconda and installing Python directly.

There are several reasons why the first method is preferred:

First, we can use a Python editor called Spyder, which is quite convenient for writing and editing our Python programs. For example, it has several windows (panels): one for the console, where we can type our commands directly; one for the program editor, where we can write and edit our programs; one for Variable Explorer,where we can view our variables and their values; and one for help, where we can seek help.

Second, different colors for codes or comment lines will help us avoid some obvious typos and mistakes.

Third, when installing Anaconda, many modules are installed simultaneously. A module is a set of programs written by experts, professionals, or any person around a specific topic. It could be viewed as a toolbox for a specific task. To speed up the process of developing new tools, a new module usually depends on the functions embedded in other, already developed modules. This is called module dependency. One disadvantage of such a module dependency is how to install them at the same time. For more information about this,