In this post, we will provide an example of machine learning regression algorithm using the multivariate linear regression in Python from scikit-learn library in Python. The example contains the following steps:

**Step 1:** Import libraries and load the data into the environment.

**Step 2:** Generate the features of the model that are related with some measure of volatility, price and volume.

**Step 3:** Visualize the correlation between the features and target variable with scatterplots.

**Step 4:** Create the train and test dataset and fit the model using the linear regression algorithm.

**Step 5:** Make predictions, obtain the performance of the model, and plot the results.

**Step 1:** Import libraries and load the data into the environment.

We will first import the required libraries in our Python environment.

```
import pandas as pd
from datetime import datetime
import numpy as np
from sklearn.linear_model import LinearRegression
import matplotlib.pyplot as plt
```

We will work with SPY data between dates 2010-01-04 to 2015-12-07.

First we use the `read_csv()`

method to load the csv file into the environment. *Make sure to update the file path to your directory structure.*

```
SPY_data = pd.read_csv("C:/Users/FT/Documents/MachineLearningCourse/SPY_regression.csv")
# Change the Date column from object to datetime object
SPY_data["Date"] = pd.to_datetime(SPY_data["Date"])
# Preview the data
SPY_data.head(10)
```

The data has the following structure:

```
Date Open High Low Close Volume Adj Close
0 2015-12-07 2090.419922 2090.419922 2066.780029 2077.070068 4.043820e+09 2077.070068
1 2015-12-04 2051.239990 2093.840088 2051.239990 2091.689941 4.214910e+09 2091.689941
2 2015-12-03 2080.709961 2085.000000 2042.349976 2049.620117 4.306490e+09 2049.620117
3 2015-12-02 2101.709961 2104.270020 2077.110107 2079.510010 3.950640e+09 2079.510010
4 2015-12-01 2082.929932 2103.370117 2082.929932 2102.629883 3.712120e+09 2102.629883
5 2015-11-30 2090.949951 2093.810059 2080.409912 2080.409912 4.245030e+09 2080.409912
6 2015-11-27 2088.820068 2093.290039 2084.129883 2090.110107 1.466840e+09 2090.110107
7 2015-11-25 2089.300049 2093.000000 2086.300049 2088.870117 2.852940e+09 2088.870117
8 2015-11-24 2084.419922 2094.120117 2070.290039 2089.139893 3.884930e+09 2089.139893
9 2015-11-23 2089.409912 2095.610107 2081.389893 2086.590088 3.587980e+09 2086.590088
```

Let’s now set the Date as index and reverse the order of the dataframe in order to have oldest values at top.

```
# Set Date as index
SPY_data.set_index('Date',inplace=True)
# Reverse the order of the dataframe in order to have oldest values at top
SPY_data.sort_values('Date',ascending=True)
```

**Step 2:** Generate features of the model

We will generate the following features of the model:

- High – Low percent change
- 5 periods Exponential Moving Average
- Standard deviation of the price over the past 5 days
- Daily volume percent change
- Average volume for the past 5 days
- Volume over close price ratio

```
SPY_data['High-Low_pct'] = (SPY_data['High'] - SPY_data['Low']).pct_change()
SPY_data['ewm_5'] = SPY_data["Close"].ewm(span=5).mean().shift(periods=1)
SPY_data['price_std_5'] = SPY_data["Close"].rolling(center=False,window= 30).std().shift(periods=1)
SPY_data['volume Change'] = SPY_data['Volume'].pct_change()
SPY_data['volume_avg_5'] = SPY_data["Volume"].rolling(center=False,window=5).mean().shift(periods=1)
SPY_data['volume Close'] = SPY_data["Volume"].rolling(center=False,window=5).std().shift(periods=1)
```

### Step 3: Visualize the correlation between the features and target variable

Before training the dataset, we will make some plots to observe the correlations between the features and the target variable.

```
jet= plt.get_cmap('jet')
colors = iter(jet(np.linspace(0,1,10)))
def correlation(df,variables, n_rows, n_cols):
fig = plt.figure(figsize=(8,6))
#fig = plt.figure(figsize=(14,9))
for i, var in enumerate(variables):
ax = fig.add_subplot(n_rows,n_cols,i+1)
asset = df.loc[:,var]
ax.scatter(df["Adj Close"], asset, c = next(colors))
ax.set_xlabel("Adj Close")
ax.set_ylabel("{}".format(var))
ax.set_title(var +" vs price")
fig.tight_layout()
plt.show()
# Take the name of the last 6 columns of the SPY_data which are the model features
variables = SPY_data.columns[-6:]
correlation(SPY_data,variables,3,3)
```

The correlation matrix between the features and the target variable has the following values:

```
SPY_data.corr()['Adj Close'].loc[variables]
High-Low_pct -0.010328
ewm_5 0.998513
price_std_5 0.100524
volume Change -0.005446
volume_avg_5 -0.485734
volume Close -0.241898
```

Either the scatterplot or the correlation matrix reflects that the Exponential Moving Average for 5 periods is very highly correlated with the Adj Close variable. Secondly is possible to observe a negative correlation between Adj Close and the volume average for 5 days and with the volume to Close ratio.

### Step 4: Train the Dataset and Fit the model

Due to the feature calculation, the ** SPY_data** contains some NaN values that correspond to the first’s rows of the exponential and moving average columns. We will see how many Nan values there are in each column and then remove these rows.

```
SPY_data.isnull().sum().loc[variables]
High-Low_pct 1
ewm_5 1
price_std_5 30
volume Change 1
volume_avg_5 5
volume Close 5
# To train the model is necessary to drop any missing value in the dataset.
SPY_data = SPY_data.dropna(axis=0)
# Generate the train and test sets
train = SPY_data[SPY_data.index < datetime(year=2015, month=1, day=1)]
test = SPY_data[SPY_data.index >= datetime(year=2015, month=1, day=1)]
dates = test.index
```

### Step 5: Make predictions, obtain the performance of the model, and plot the results

In this step, we will fit the model with the LinearRegression classifier. We are trying to predict the Adj Close value of the Standard and Poor’s index. # So the target of the model is the “Adj Close” Column.

```
lr = LinearRegression()
X_train = train[["High-Low_pct","ewm_5","price_std_5","volume_avg_5","volume Change","volume Close"]]
Y_train = train["Adj Close"]
lr.fit(X_train,Y_train)
```

Create the test features dataset (`X_test`

) which will be used to make the predictions.

```
# Create the test features dataset (X_test) which will be used to make the predictions.
X_test = test[["High-Low_pct","ewm_5","price_std_5","volume_avg_5","volume Change","volume Close"]].values
# The labels of the model
Y_test = test["Adj Close"].values
```

Predict the `Adj Close`

values using the `X_test`

dataframe and Compute the Mean Squared Error between the predictions and the real observations.

```
close_predictions = lr.predict(X_test)
mae = sum(abs(close_predictions - test["Adj Close"].values)) / test.shape[0]
print(mae)
18.0904
```

We have that the **Mean Absolute Error** of the model is 18.0904. This metric is more intuitive than others such as the **Mean Squared Error**, in terms of how close the predictions were to the real price.

Finally we will plot the error term for the last 25 days of the test dataset. This allows observing how long is the error term in each of the days, and asses the performance of the model by date.

```
# Create a dataframe that output the Date, the Actual and the predicted values
df = pd.DataFrame({'Date':dates,'Actual': Y_test, 'Predicted': close_predictions})
df1 = df.tail(25)
# set the date with string format for plotting
df1['Date'] = df1['Date'].dt.strftime('%Y-%m-%d')
df1.set_index('Date',inplace=True)
error = df1['Actual'] - df1['Predicted']
# Plot the error term between the actual and predicted values for the last 25 days
error.plot(kind='bar',figsize=(8,6))
plt.grid(which='major', linestyle='-', linewidth='0.5', color='green')
plt.grid(which='minor', linestyle=':', linewidth='0.5', color='black')
plt.xticks(rotation=45)
plt.show()
```

This concludes our example of Multivariate Linear Regression in Python.

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