13. Cross Validation Demo

Cd13639 C1 L4 DEMO 4 V1

Enhancing Model Performance with Cross Validation

Objective: Introduce cross validation to improve decision trees through hyperparameter tuning.

Concepts Explained:

  • Cross Validation: Divides dataset into subsections or "folds", ensuring broader model training and better generalization by avoiding overfitting.
  • Hyperparameter Tuning: Uses GridSearchCV to optimize decision tree components.

Process Outline:

  • Library Imports: Decision tree classifier and GridSearchCV for managing cross validation.
  • Data Preparation:
    • Involve existing datasets to calculate total returns
    • Creation of indicator variables and split into training/testing sets (70% train, 30% test)
  • Standardization: Ensure feature uniformity by standardizing training data.
  • Model Training & Evaluation:
    • Apply GridSearchCV to specify hyperparameter grids (e.g., gini impurity, max depth, minimum sample splits)
    • Employ five-fold cross validation for comprehensive testing
    • Evaluate performances (Benchmark vs. Decision Tree CV Model)

Outcome: Enhanced Decision Tree CV model resulted in improved returns (14.9% CAGR) with consistent performance across most tested periods. This demonstrates the effectiveness of cross validation in optimizing model reliability and accuracy.