L05 Unsupervised Learning

We will...

• Algorithms
  • Dimensionality Reduction: PCA
  • Clustering: K-Means
• Coding with python
• Financial applications

Challenges

• Unsupervised learning: a set of features measured on observations (without target )

• Goal: To discover interesting things about the measurements on

  • Is there an informative way to visualize the data?
  • Can we discover subgroups among the variables or among the observations?

• The Challenge of Unsupervised Learning

  • exercise tends to be more subjective
  • there is no simple goal for the analysis

Principal Components Analysis （PCA）

How to visualize high dimensional data? (The Iris Classification Example)

tabular data with a small number of features: pair plot higher-dimensional data: dimension reduction first and then to visualize the data in 2d or 3d The big idea of PCA: fnd a low-dimensional representation of a data set that contains as much as possible of the variation

Examples

• a simple example project from 2d to 1d

• hand writing digit recognition (28*28d to 2d)

• human face recognition (64*64d to 3d)

A Detailed Example

• A set of (p-dimensional) features

• The first principal component

  • is the normalized linear combination of the features that has the largest variance.
  • the loadings of the first principal component:
  • the principal component loading vector,

• for a specific point :

• the most imformative direction: :

• the second principal component
  • maximal variance out of all linear combinations that are uncorrelated with

Another Interpretation of Principal Components

Principal components provide low-dimensional linear surfaces that are closest to the observations.

The Proportion of Variance Explained （PVE）

• The total variance present in a data set is defined as

• the variance explained by the th principal component is

• the PVE of the th principal component

• the variance of the data can be decomposed into the variance of the first principal components plus the mean squared error of this -dimensional approximation, as follows:

• we can interpret the PVE as the of the approximation for given by the first principal components.

Clustering Methods

K-Means Clustering

• Partitioning a data set into distinct, non-overlapping clusters.

• Let denote sets containing the indices of the observations in each cluster. These sets satisfy two properties:
  • 1. . In other words, each observation belongs to at least one of the clusters.
  • 2. for all . In other words, the clusters are nonoverlapping: no observation belongs to more than one cluster.
• the big idea
  • within-cluster variation is as small as possible
  • within-cluster variation

Financial applications