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From physics to economics: An econometric example using maximum relative entropy

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  • Giffin, Adom

Abstract

Econophysics, is based on the premise that some ideas and methods from physics can be applied to economic situations. We intend to show in this paper how a physics concept such as entropy can be applied to an economic problem. In so doing, we demonstrate how information in the form of observable data and moment constraints are introduced into the method of Maximum relative Entropy (MrE). A general example of updating with data and moments is shown. Two specific econometric examples are solved in detail which can then be used as templates for real world problems. A numerical example is compared to a large deviation solution which illustrates some of the advantages of the MrE method.

Suggested Citation

  • Giffin, Adom, 2009. "From physics to economics: An econometric example using maximum relative entropy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1610-1620.
  • Handle: RePEc:eee:phsmap:v:388:y:2009:i:8:p:1610-1620
    DOI: 10.1016/j.physa.2008.12.066
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    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Schools of Economic Thought, Epistemology of Economics > Heterodox Approaches > Thermoeconomics

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    Cited by:

    1. Secrest, J.A. & Conroy, J.M. & Miller, H.G., 2020. "A unified view of transport equations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 547(C).
    2. Zhou, Daoqing & He, Jingjing & Du, Yi-Mu & Sun, C.P. & Guan, Xuefei, 2021. "Probabilistic information fusion with point, moment and interval data in reliability assessment," Reliability Engineering and System Safety, Elsevier, vol. 213(C).
    3. Giffin, Adom & Cafaro, Carlo & Ali, Sean Alan, 2016. "Application of the maximum relative entropy method to the physics of ferromagnetic materials," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 455(C), pages 11-26.

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