Chapter 7: Probability Models
Introduction
A probability model is a regression model that maps the outcome of the dependent variable yto values between 0 and 1. These y values correspond to the probability that the event will occur. Probability models are used in many different areas of finance and other professions. For example, probability models are used in finance to estimate the probability of bond defaults or credit rating change, and in algorithmic trading to determine the probability of filling an order at a specified price and at a specified destination. Probability models are also used in the sports world to estimate the probability that a team will win a game or beat a specified sporting line. For example, what is the probability ...
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