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Clustering
Clustering is the process of grouping similar entities together. Each similar group is called a cluster and contains statistically similar data points.
Clustering Tasks
Clustering Problems
Data clustering is just starting to take root in Finance. The potential of clustering is enormous as these applications to solve open problems illustrate:
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Pre-hedging in execution: finding the most similar instruments.
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Selling in crisis: again, sell the most similar liquid instrument.
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Loan ratings: have ratings for public companies, quickly find most similar ones for private loans.
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Consumer ratings: based on online behavior, match consumers into credit buckets with known credit ratings.
Clustering Types
Clustering is divided into two subgroups based on the assignment of data points to clusters:
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Soft: Each data point is assigned a probability or likelihood of being in a cluster. One example is expectation-maximization (EM) algorithm.
B. Clustering