Companion files

Machine Learning for Finance

A Practitioner’s Guide to Building, Validating and Defending a Credit Model That Decides

Julian R. Sterling

These are the four Excel workbooks that go with the book. Every figure the book prints is reproduced in them by a live formula rather than a typed constant — move a bin boundary, change the loss given default, drag the cut-off, and every dependent number moves. Each one ends with a Checks sheet setting the printed figure beside the computed one: 140 controls in all, every one green. If a control ever reads FAIL, the workbook is wrong, not the book.

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The four workbooks

• Chapters 1 to 6

  The card, built from counts

  Eight thousand four hundred applications as a filterable table, and the whole scorecard built on top of them from nothing but counts. Bin tables for all seven characteristics, the weight of evidence as the logarithm of the ratio of good share to bad share, the contribution of every bin to the information value, and the information value as a column total.

  The eighth characteristic is there too, the one that cannot be used: days past due at month three, with an information value of 2.8606 against 0.2471 for the best usable field on the extract. Put it into the model and the area under the curve goes from 0.7353 to 0.9125. It is measured three months after the money is lent. The points table then derives its own factor and offset from twenty points to double the odds and six hundred points at fifty to one — 28.8539 and 487.1229 — rather than taking them as given.

  The_Card.xlsx · XLSX · 261 KB

• Chapters 7 to 10

  Ranking, and then level

  The score is rebuilt row by row from the points table by lookup, not carried, and reconciled against the reference model to seven decimals. On top of it: the ten development bands, the area under the curve by ranks — 0.735329 — Gini at 0.470659, and KS at 0.341154 with its exact location on the scale.

  Then the distinction the book is built on. Out of time the ranking barely moves, to 0.718513. The level moves a great deal: the card under-predicts the bad rate in nine bands out of ten, by 9.612 percentage points in the worst. The sheet solves the single-parameter fix on the page — an intercept shift of 0.573620 in log-odds, which is 16.55 points — and shows what it does and does not repair.

  Discrimination_and_Calibration.xlsx · XLSX · 314 KB

• Chapters 11 and 12

  Drift, and the applicants you never saw

  The out-of-time distribution laid on the fixed development boundaries, which is the only way to see a population move: recompute the deciles on the new population and you erase exactly what you were trying to measure. Every population stability index term appears as its own row — share difference times the logarithm of the share ratio — summing to 0.090517, with the top band alone contributing 0.029335 as it falls from 10.00 per cent of the book to 5.33.

  Then the sample nobody quotes. Through the door the applications run at 8.1190 per cent bad; the accepted book runs at 5.2224 per cent and the declined at 12.7554 per cent. The sheet rebuilds the split from the four hand-written policy rules and reconciles it to 682 bad cases, so you can watch a model's measured accuracy change with nothing but the population it is measured on.

  Stability_and_the_Door.xlsx · XLSX · 311 KB

• Chapters 13 to 15

  The number that actually decides

  The unit economics derived on the sheet rather than asserted: 185,000 of exposure at 4.12 per cent of margin less 640 of cost gives 6,982 for a loan that performs; 41.7 per cent of loss plus the same 640 gives minus 77,785 for one that does not; the swing is 84,767 and the break-even bad rate is 8.2367 per cent.

  Both profit grids run live from 480 to 640 points. On the development book the peak is at 550 points, approving 83.50 per cent and earning 17,348,284; at 600, the score a nervous committee reaches for, the same book earns 5,596,817. Switch the grid to 2020 and 2021 and the peak has moved thirty points, to 580: a policy left at 550 turns 2,563,882 into a loss of 149,416. The last sheet sets the card against a hundred and eighty boosted trees at equal approval rates, in both years.

  The_Cut_Off.xlsx · XLSX · 339 KB

Conventions used throughout

Blue text	a hardcoded input — you may edit these
Yellow fill	an input cell; everything else on the sheet is a formula
Black text	a formula — do not overtype these
Checks sheet	the printed figure beside the computed one, with a PASS or a FAIL

Why the checks matter more than the models

A workbook that agrees with a book proves nothing on its own — the author wrote both. What the Checks sheets do is different: they force the model to reproduce, from a formula, a number that was printed before the model existed.

Two quantities are carried as data rather than recomputed, and both are flagged as inputs on the page itself. The eight fitted regression coefficients, because a logistic regression cannot be fitted in a spreadsheet. And the boosted-tree score on every row, because an ensemble of a hundred and eighty trees cannot be rebuilt in one either. Everything downstream of them — their area under the curve, their bands, their profit at every approval rate — is computed by the same live formulas as the card's, so the comparison is like for like.

Where two correct computations disagree, both are printed. The rank-sliced deciles put exactly 600 cases in every band; the fixed-boundary bands, which calibration and the stability index require, put 600, 599, 601, 600, 600, 598, 602, 600, 600 and 600, because scores repeat and ties have to fall on one side. Two non-bad cases move. Neither table is wrong and the gap is not smoothed away.

Opening the files

The workbooks open in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. They use no macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to update links on opening, decline — there are none.

Articles on this book

• What does leaving a credit score cut-off unchanged actually cost?The optimum cut-off moved from 550 points to 580; the policy did not. One year of that inertia cost 2,713,298.
• Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.

Also by Julian R. Sterling

The other books with companion files. The full list of titles is on the author page.

• Breaking Into European Defence ProcurementThe money and the instruments, the 35 per cent content test, and proposal economics.
• Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
• CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
• How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
• How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
• How to Read a Limited Partnership AgreementWhat the clawback actually collateralises, and why every dollar won on the tax clause lands in the uncollateralised column.
• How to Read a Private Funds Financial StatementsThe Harbourgate reporting pack, five worked cases, and rebuilding your own account.
• How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
• Insurance Capital for Asset ManagersWhy the same fund costs two insurers different amounts, and what opacity costs a manager in euros.
• Logistics and Industrial Real EstateNet effective rent, the ageing asset, and the development letting decision.
• Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
• Operational Due Diligence in Private EquityThe rating model built and then broken, and why refining a rubric weakens it.
• Personal Finance for BeginnersWhat a minimum payment really does, and what the snowball and the emergency fund actually cost.
• Private Equity Investor RelationsWhat a fund has returned, read six ways — and the eleven-point gap between them.
• Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
• Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
• Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
• Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
• Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
• Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
• Real Estate Joint VenturesThe JV waterfall and promote, the complete venture, and failure to fund.
• Real Estate Transaction Due DiligenceWhat the diligence cost, which workstreams paid for themselves, and the investigation the book skips, priced.
• REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
• Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
• Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
• Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
• Senior Living and Healthcare Real EstateThe resident engine of a seventy-bed home, the payor mix, and a rota costed at the employer's real hourly rate.
• Significant Risk TransferThe bank's ceiling and the investor's floor derived independently, and the narrow band of prices at which both can say yes.
• Stock Market Investing for BeginnersWhat compounding and fees actually cost, with figures — and a calculator for your own.
• Student Housing Real EstateRevenue per available bed against the rate card, the letting campaign week by week, and the cost base of a 520-bed scheme.
• The AIFMD II HandbookThe reverse stress test computed, and the facility term that moves it more than any asset.
• The Asset-Based Finance HandbookThe borrowing base off a live loan tape, the Meridian transaction, and trigger design.
• The CBAM Compliance HandbookWhat 2027 really costs, how big the buffer should be, and the term the surrender formula counts twice.
• The Co-Investment PractitionerWhat dilution really costs, what a pay-to-play clause is worth, and how much to hold back.
• The Continuation Fund HandbookThe Thalia transaction, the bid funnel, and the fees behind the roll decision.
• The Data Center Development HandbookThe underwrite computed: the levered return the chapter never builds, and what a twelve-month slip costs.
• The Distressed Debt InvestorWhere the fulcrum security actually breaks, and what an 80-cent recovery is worth once composition and time are priced.
• The ESG Manager in Private EquityThe exit in equity and IRR, the line the book drops, and the half-turn nobody controls.
• The EU AML HandbookThe back book sized, and the month beyond which no headcount recovers a one-year window.
• The Evergreen Fund HandbookWhat the sleeve costs, and the headline IRR at which a closed-ended fund merely ties.
• The Family Office ProfessionalWhat an office costs, and the level of wealth at which building one starts to pay.
• The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
• The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
• The Infrastructure Investment AnalystDebt sculpted to a coverage floor, and one asset valued twice to the last decimal.
• The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
• The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
• The Private Equity Operating PartnerThe value creation bridge built in full, and who actually made the return.
• The Private Fund Compliance OfficerThe grey zone as basis points, a broken deal four ways, and how many items you must test.
• The Private Markets Limited PartnerWhat a co-investment programme really saves, and the loss rate that erases it.
• The Private Markets Valuation SpecialistThe book describes its illustrations without numbers on purpose. These files close the chain, with every step visible.
• The Private Wealth FundraiserThree peaks, years apart, and the signature that tells a forecast miss apart.
• The Real Estate Asset ManagerBusiness plans, leasing, and what deferring the work on a building actually costs.
• The Real Estate Debt InvestorThe margin against the return on capital, the floor priced, and what prepayment protection buys.
• The Real Estate Development ManagerThe residual appraisal, the worked scheme, land diligence and the risk register.
• The Real Estate Secondaries InvestorAn eighteen per cent discount to net asset value that is really 9.18 once the reported value is unsmoothed.
• The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
• Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
• Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
• Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
• Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
• Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
• Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
• Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
• Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
• Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
• DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
• Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
• Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
• Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
• The Private Equity Secondaries InvestorThe seller’s floor beside the buyer’s ceiling — and the zone that usually is not there.
• Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.