Cointegration
What is Cointegration? A cointegration test is used to establish if there is a correlation between several time series in the long term. The concept was first introduced by Nobel laureates Robert Engle and Clive Granger in 1987 after British economist Paul Newbold and Granger published the spurious regression concept. Cointegration tests identify scenarios where...
Empirical Probability
What is Empirical Probability? Empirical probability, also known as experimental probability, refers to a probability that is based on historical data. In other words, empirical probability illustrates the likelihood of an event occurring based on historical data. Formula for Empirical Probability Where: Number of Times Occurred refers to the number of times a favorable event...
Adjusted R-squared
What is the Adjusted R-squared? The adjusted R-squared is a modified version of R-squared that accounts for predictors that are not significant in a regression model. In other words, the adjusted R-squared shows whether adding additional predictors improve a regression model or not. To understand adjusted R-squared, an understanding of R-squared is required. What is...
Subjective Probability
What is Subjective Probability? Subjective probability refers to the probability of something happening based on an individual’s own experience or personal judgment. A subjective probability is not based on market data or historical information and differs from person to person. In other words, it is created from the opinion of an individual and is not...
Joint Probability
What is a Joint Probability? A joint probability, in probability theory, refers to the probability that two events will both occur. In other words, joint probability is the likelihood of two events occurring together. Formula for Joint Probability Where: P(A ⋂ B) is the notation for the joint probability of event “A” and “B”. P(A)...
A Priori Probability
What is A Priori Probability? A priori probability, also known as classical probability, is a probability that is deduced from formal reasoning. In other words, a priori probability is derived from logically examining an event. A priori probability does not vary from person to person (as would a subjective probability) and is an objective probability....
Unconditional Probability
What is Unconditional Probability? Unconditional probability, also known as marginal probability, refers to a probability that is unaffected by previous or future events. In other words, unconditional probability is the probability of an event regardless of the preceding or future occurrence of other events. In simplest terms, unconditional probability is simply the probability of an...
Addition Rule for Probabilities
What is the Addition Rule for Probabilities? Given multiple events, the addition rule for probabilities is used to compute the probability that at least one of the events happens. Probability can be defined as the branch of mathematics that quantifies the certainty or uncertainty of an event or a set of events. Related Concepts Before...
Overfitting
What is Overfitting? Overfitting is a term used in statistics that refers to a modeling error that occurs when a function corresponds too closely to a particular set of data. As a result, overfitting may fail to fit additional data, and this may affect the accuracy of predicting future observations. Overfitting can be identified by...
Random Forest
What is Random Forest? Random forest is a technique used in modeling predictions and behavior analysis and is built on decision trees. It contains many decision trees representing a distinct instance of the classification of data input into the random forest. The random forest technique considers the instances individually, taking the one with the majority of...
