Naïve Bayes classifiers

This conditional independence between X features is an essential requirement for the Naïve Bayes classifier. It also restricts its applicability. The Naïve Bayes classification is better understood through simple, concrete examples [5:5].

Introducing the multinomial Naïve Bayes

Let's consider the problem of how to predict change in interest rates. The first step is to list the factors that potentially may trigger or cause an increase or decrease in the interest rates. For the sake of illustrating Naïve Bayes, we will select the consumer price index (CPI), change in the Federal fund rate (FDF) and the gross domestic product (GDP) as a first set of features. The terminology is described in the Terminology section under Finances 101 in Appendix A, Basic Concepts.

The use case is to predict direction of the change in the yield of the 1-year Treasury bill (1yTB), taking into account the change in the current CPI, FDF, and GDP. The objective...