""" Fractional differentiation is a technique to make a time series stationary but also retain as much memory as possible. This is done by differencing by a positive real number. Fractionally differenced series can be used as a feature in machine learning process. """ import matplotlib.pyplot as plt import numpy as np import pandas as pd from loguru import logger from numba import njit, prange from statsmodels.tsa.stattools import adfuller @njit(cache=True) def get_weights(d, size): """ Advances in Financial Machine Learning, Chapter 5, section 5.4.2, page 79. The helper function generates weights that are used to compute fractionally differentiated series. It computes the weights that get used in the computation of fractionally differentiated series. This generates a non-terminating series that approaches zero asymptotically. The side effect of this function is that it leads to negative drift "caused by an expanding window's added weights" (see page 83 AFML) When d is real (non-integer) positive number then it preserves memory. The book does not discuss what should be expected if d is a negative real number. Conceptually (from set theory) negative d leads to set of negative number of elements. And that translates into a set whose elements can be selected more than once or as many times as one chooses (multisets with unbounded multiplicity) - see http://faculty.uml.edu/jpropp/msri-up12.pdf. :param d: (float) Differencing amount :param size: (int) Length of the series :return: (np.ndarray) Weight vector """ # The algorithm below executes the iterative estimation (section 5.4.2, page 78) weights = [1.0] # create an empty list and initialize the first element with 1. for k in range(1, size): weights_ = -weights[-1] * (d - k + 1) / k # compute the next weight weights.append(weights_) # Now, reverse the list, convert into a numpy column vector weights = np.array(weights[::-1]).reshape(-1, 1) return weights @njit(parallel=True, cache=True) def _frac_diff_numba_core(series_values, weights, skip): """ Numba-optimized core function for fractional differencing. This function handles the heavy lifting of applying weights to the series values. :param series_values: (np.ndarray) The series values as a NumPy array. :param weights: (np.ndarray) The pre-computed weights. :param skip: (int) The number of initial calculations to skip. :return: (np.ndarray) The differenced series values. """ N = len(series_values) output_values = np.empty(N, dtype=np.float64) output_values[:] = ( np.nan ) # Initialize with NaN, as per pd.Series dtype='float64' behavior for iloc in prange(skip, N): output_values[iloc] = np.dot( weights[-(iloc + 1) :, :].T, series_values[: iloc + 1].reshape(-1, 1) )[0, 0] return output_values def frac_diff(series, d, thres=0.01, use_log=True): """ Advances in Financial Machine Learning, Chapter 5, section 5.5, page 82. References: https://www.wiley.com/en-us/Advances+in+Financial+Machine+Learning-p-9781119482086 https://wwwf.imperial.ac.uk/~ejm/M3S8/Problems/hosking81.pdf https://en.wikipedia.org/wiki/Fractional_calculus The steps are as follows: - Compute weights (this is a one-time exercise) - Iteratively apply the weights to the price series and generate output points This is the expanding window variant of the fracDiff algorithm Note 1: For thres-1, nothing is skipped Note 2: d can be any positive fractional, not necessarility bounded [0, 1] :param series: (pd.DataFrame) A time series that needs to be differenced :param d: (float) Differencing amount :param thres: (float) Threshold or epsilon :param use_log: (bool) If True, apply log transformation before differencing :return: (pd.DataFrame) Differenced series """ if isinstance(series, pd.Series): series = series.copy().to_frame() # Apply log transformation for price series if use_log: # Ensure no zero or negative values series_processed = np.log(series.clip(lower=1e-8)) else: series_processed = series.copy() series_processed = series_processed.astype("float64") columns = series_processed.columns # 1. Compute weights for the longest series weights = get_weights(d, series.shape[0]) # 2. Determine initial calculations to be skipped based on weight-loss threshold weights_ = np.cumsum(abs(weights)) weights_ /= weights_[-1] skip = weights_[weights_ > thres].shape[0] # 3. Apply weights to values using the Numba-optimized core function output_df = {} for name in columns: # Prepare data for Numba: ensure it's a contiguous NumPy array series_f_values = series_processed[[name]].ffill().dropna().values # Call the Numba-optimized core function output_values_numba = _frac_diff_numba_core(series_f_values, weights, skip) # Convert back to Pandas Series, retaining original index # We need to ensure the index aligns, and NaNs are handled output_series = pd.Series( output_values_numba, index=series[name].ffill().dropna().index, dtype="float64", ) # Merge back with the original series index to handle initial NaNs final_output_series = pd.Series(index=series.index, dtype="float64") final_output_series.update(output_series) # Updates matching index values output_df[name] = final_output_series output_df = pd.concat(output_df, axis=1) return output_df @njit(cache=True) def get_weights_ffd(d, thres, lim): """ Advances in Financial Machine Learning, Chapter 5, section 5.4.2, page 83. The helper function generates weights that are used to compute fractionally differentiate dseries. It computes the weights that get used in the computation of fractionally differentiated series. The series is of fixed width and same weights (generated by this function) can be used when creating fractional differentiated series. This makes the process more efficient. But the side-effect is that the fractionally differentiated series is skewed and has excess kurtosis. In other words, it is not Gaussian any more. The discussion of positive and negative d is similar to that in get_weights (see the function get_weights) :param d: (float) Differencing amount :param thres: (float) Threshold for minimum weight :param lim: (int) Maximum length of the weight vector :return: (np.ndarray) Weight vector """ weights = [1.0] k = 1 # The algorithm below executes the iterativetive estimation (section 5.4.2, page 78) # The output weights array is of the indicated length (specified by lim) ctr = 0 while True: # compute the next weight weights_ = -weights[-1] * (d - k + 1) / k if abs(weights_) < thres: break weights.append(weights_) k += 1 ctr += 1 if ctr == lim - 1: # if we have reached the size limit, exit the loop break # Now, reverse the list, convert into a numpy column vector weights = np.array(weights[::-1]).reshape(-1, 1) return weights @njit(parallel=True, cache=True) def _frac_diff_ffd_numba_core(series_values, weights, skip): """ Numba-optimized core function for fractional differencing. This function handles the heavy lifting of applying weights to the series values. :param series_values: (np.ndarray) The series values as a NumPy array. :param weights: (np.ndarray) The pre-computed weights. :param skip: (int) The number of initial calculations to skip. :return: (np.ndarray) The differenced series values. """ N = len(series_values) weights = weights.T arr = np.empty(N, dtype=np.float64) for i in prange(skip, N): arr[i] = np.dot(weights, series_values[i - skip : i + 1])[0, 0] return arr[skip:] def frac_diff_ffd(series, d, thres=1e-5, use_log=True): """ Advances in Financial Machine Learning, Chapter 5, section 5.5, page 83. References: * https://www.wiley.com/en-us/Advances+in+Financial+Machine+Learning-p-9781119482086 * https://wwwf.imperial.ac.uk/~ejm/M3S8/Problems/hosking81.pdf * https://en.wikipedia.org/wiki/Fractional_calculus The steps are as follows: - Compute weights (this is a one-time exercise) - Iteratively apply the weights to the price series and generate output points Constant width window (new solution) Note 1: thres determines the cut-off weight for the window Note 2: d can be any positive fractional, not necessarity bounded [0, 1]. :param series: (pd.DataFrame) A time series that needs to be differenced :param d: (float) Differencing amount :param thres: (float) Threshold for minimum weight :param use_log: (bool) If True, apply log transformation before differencing :return: (pd.Series or pd.DataFrame) A Series or DataFrame of Fractionally differenced series """ if isinstance(series, pd.Series): series = series.copy().to_frame() # Apply log transformation for price series if use_log: # Ensure no zero or negative values series_processed = np.log(series.clip(lower=1e-8)) else: series_processed = series.copy() series_processed = series_processed.astype("float64") columns = series_processed.columns # Compute weights weights = get_weights_ffd(d, thres, series_processed.shape[0]) width = len(weights) - 1 # Apply weights to values df = {} for name in columns: series_f = series_processed[[name]].ffill().dropna() ffd = _frac_diff_ffd_numba_core(series_f.values, weights, width) df[name] = pd.Series(ffd, index=series_f.index[width:]) df = pd.concat(df, axis=1) if len(columns) == 1: return df.squeeze() return df def adf_data(df1, df2, d=0, out_df=None, alpha=0.05): """ Calculate ADF statistics and correlation between original data series and differenced series. :param df1: (pd.Series) Original data :param df2: (pd.Series) Fractionally differentiated data :param alpha: (float) either 0.01 or 0.05 :param out_df: (pd.DataFrame) A data frame of ADF statistics :return out_df: (pd.DataFrame) A data frame of ADF statistics """ corr = np.corrcoef(df1.loc[df2.index], df2)[0, 1] adf = adfuller(df2, maxlag=1, regression="c", autolag=None) tc_col = f"{1 - alpha:.0%} conf" columns = [ "adfStat", "pVal", "lags", "nObs", "window", tc_col, "corr", "stationary", ] vals = ( list(adf[:4]) + [df1.shape[0] - adf[3]] + [adf[4][f"{alpha:.0%}"]] + [corr] + [False] ) if out_df is None or out_df.empty: out_df = {d: {k: v for k, v in zip(columns, vals)}} out_df = pd.DataFrame.from_dict(out_df, orient="index") else: out_df.loc[d, columns] = vals stationary = (out_df.loc[d, "adfStat"] < out_df.loc[d, tc_col]) and ( out_df.loc[d, "pVal"] < alpha ) out_df.loc[d, "stationary"] = stationary out_df.index.name = "d" return out_df def fracdiff_optimal( series, fixed_width=True, alpha=0.05, max_d=1.0, tol=1e-3, use_log=True, verbose=False, ): """ Determines the smallest differentiation factor (d) required for stationarity in fractional differencing using a binary search approach. This function finds the optimal differentiation parameter (d) such that the series passes the Augmented Dickey-Fuller (ADF) test for stationarity, minimizing the loss of memory in the differenced series. Parameters ---------- series : pd.Series Time series data to be fractionally differenced. fixed_width : bool, default=True If True, applies fixed-width fractional differencing. If False, uses an expanding window approach. alpha : float, default=0.05 Significance threshold for the ADF test. A smaller alpha requires stronger evidence for stationarity. max_d : float, default=1.0 Upper bound for the differentiation factor in the binary search. tol : float, default=1e-3 Tolerance for convergence in the binary search for optimal d. use_log : bool, default=True If True, apply log transformation before fractional differencing. Recommended for price series to handle multiplicative relationships. Set to False for return series or other already-processed data. verbose : bool, default=False If True, prints progress updates during the search. Returns ------- out_df : pd.Series or None Fractionally differenced series corresponding to the optimal d value. d : float or None Optimal differentiation factor that achieves stationarity. Returns None if stationarity is not detected within the given bounds. diff_adf : pd.DataFrame Dataframe containing ADF test results for all attempted d values, including p-values and correlation coefficients. Notes ----- - The function performs a **binary search** to efficiently determine the smallest d value that results in a stationary series. - Uses **fixed-width** differencing (`frac_diff_ffd`) or **expanding window** differencing (`frac_diff`) depending on `fixed_width`. - The `use_log` parameter controls preprocessing: True for price series (multiplicative), False for return series or other additive data. - The Augmented Dickey-Fuller test (`adf_data`) is applied to each differenced series to check for stationarity. - Ensures a **minimum sample size** (default: 100) for valid ADF test execution. Example ------- ```python import pandas as pd from ..fracdiff import fracdiff_optimal # For price series (use log transformation) price_series = pd.Series([100, 101, 102, 103, ...]) diff_series, d, adf_results = fracdiff_optimal(price_series, use_log=True) # For return series (skip log transformation) return_series = pd.Series([0.01, 0.01, 0.01, ...]) diff_series, d, adf_results = fracdiff_optimal(return_series, use_log=False) ``` """ if not isinstance(series, pd.Series): raise TypeError( f"Expected `series` to be a pandas Series, but got type {type(series)}" ) low, high = 0.0, max_d best_d = None diff_adf = None out_df = None max_len = 0 # Cache intermediate results to avoid recomputation frac_diff_cache = {} adf_cache = {} def frac_diff_cached(series, d, use_log): cache_key = (d, use_log) # Include use_log in cache key return frac_diff_cache.setdefault( cache_key, ( frac_diff_ffd(series, d, use_log=use_log) if fixed_width else frac_diff(series, d, use_log=use_log) ), ) def adf_cached(series, diff_series, d, out_df, alpha): return adf_cache.setdefault(d, adf_data(series, diff_series, d, out_df, alpha)) for i, _ in enumerate(range(20), 1): # Max 20 iterations for 1e-6 precision mid = (low + high) / 2 if verbose: msg = f"{i}. Testing d = {mid:.4f}" logger.debug(msg) if len(msg) > max_len: max_len = len(msg) diff = frac_diff_cached(series, mid, use_log) # Pass use_log parameter if len(diff) < 100: # Minimum sample size high = mid continue # Dataframe with ADF stats for each d diff_adf = adf_cached(series, diff, mid, diff_adf, alpha) p_value = diff_adf.loc[mid, "pVal"] if diff_adf.loc[mid, "stationary"] == 1: out_df = diff.copy() if p_value < alpha: best_d = mid high = mid # Try smaller d else: low = mid # Need larger d if high - low < tol: break d = round(best_d, 4) if best_d is not None else max_d diff_adf.index = diff_adf.index.round(4) # Round index to match with d if verbose: if best_d is None: logger.info("No stationary series found.") return (None, None, None) log_msg = "log-transformed " if use_log else "" msg = ( f"d = {d} makes {log_msg}'{series.name if series.name else 'series'}' stationary for ADF test (α = {alpha}) with " f"ρ = {diff_adf.loc[d, 'corr']:.4f}" ) logger.info(msg) return out_df, d, diff_adf def plot_min_ffd(adf: pd.DataFrame): """ Create plot of minimum fractional differentiation value needed to make Series stationary at 5% confidence with Augmented Dickey-Fuller test. """ adf = adf.sort_index() fig = adf[["adfStat", "corr"]].plot(figsize=(12, 6), secondary_y="adfStat") plt.axhline(adf["95% conf"].mean(), linewidth=1, color="r", linestyle="dotted") return fig def plot_ffd_vs_data(ffd: pd.Series, data: pd.Series, d: float, name: str = "close"): # from matplotlib.ticker import FuncFormatter x1 = ffd.index x2 = data.index y1 = ffd.values y2 = data.values fig, ax1 = plt.subplots(figsize=(14, 6)) ax1.plot(x1, y1, "g-") ax1.set_xlabel("Time") ax1.set_ylabel(f"FFD_{name}", color="g") # Create a second y-axis sharing the same x-axis ax2 = ax1.twinx() ax2.plot(x2, y2, "b-") ax2.set_ylabel(name, color="b") # Format x-axis labels as dates # ax2.xaxis.set_major_formatter(FuncFormatter(lambda x, _: df2['time'].iloc[int(x)].strftime("%Y-%m-%d"))) corr = np.corrcoef(data.reindex(ffd.index), ffd)[0, 1] plt.title(f"Fixed Width Fractional Differentiation (d={d:.4f}, corr={corr:.4f})") return fig