Fall 2010 Newsletter

Info-Metrics Institute College of Arts and Sciences, American University

thanks to funding from the Office of the Comptroller of the Currency and additional support, including office space, provided by the College of Arts and Sciences at American University. The Institute meets a growing need to connect researchers across disciplines who are working on issues related to information processing and inference with limited information, including the fundamental problem of how to connect the observed and unobserved quantities in a coherent way.

In its first year, the Institute has successfully

• established a core interdisciplinary research group (including an Advisory Board chaired by Robert Lerman of AU and the Urban Institute);

• organized two workshops (November 2009 and April 2010);

• hosted five short term Senior Fellows (up to two weeks each) and a semester Senior Fellow;

• provided one junior faculty summer fellowship and one graduate student summer fellowship;

• organized two short, hands-on classes taught by John Geweke of UTS, Sydney and a member of the Institute’s Advisory Board, and Graham Elliott of UC San Diego; and

• started building a major Info-Metrics resource environment for researchers on our Web site (managed by Ximing Wu of Texas A&M and a Research Associate of our Institute).

Key Institute Events 2009-10

• Fall 2009 Info-Metrics Workshop: Information Theoretic Estimation and Data Analysis

November 20, 2009

• Spring 2010 Info-Metrics Workshop: Info-Metrics in the Natural Sciences and Its

Implications for the Social SciencesApril 27, 2010

• Fall 2010 Info-Metrics Conference: Theory and ApplicationsSeptember 24–25, 2010

We plan to keep pushing the research frontiers of entropic inference and the search for improved information processing rules. We also hope to establish more long-term fellowships for students, as well as junior and senior researchers. Bookmark our Web site and check in frequently to find information about our activities. We are always open to new ideas.

As we celebrate our first anniversary, we are also saddened by the death of our colleague and friend Arnold Zellner - a true academician and a founding member of the Institute. Our September 2010 conference is dedicated to his memory.

- Amos Golan, Director, Info-Metrics Institute

Info-Metrics: An Interdisciplinary Institute

Contents

Director’s Update.........................1

Institute Events............................1

In Memoriam: Arnold Zellner........2

About the OCC............................2

Advisory Board Chair’s Message...2

Research Updates.....................3-4

Thanks to our Sponsors................3

Future Institute Events.................4

Institute Fellows Seminars...........4

Our Website..................................4

American University Info-Metrics Institute

Department of EconomicsKreeger Hall

4400 Massachusetts Ave, NWWashington, D.C. 20016-8029

202-885-3770202-885-3970 (fax)

info-metrics@american.eduwww.american.edu/info-metrics

Essie Maasoumi, Arnold Zellner, Eric Renault, Robin Lumsdaine, Yuichi Kitamura, and Ariel Caticha speak at

the Institute’s inaugural workshop in November 2009

The philosophy behind the Info-Metrics Institute is that information, information processing and entropic inference provide a unified approach to inference and learning across disciplines. The Institute’s mission is to promote the interdisciplinary study of information, information processing and decision rules based on efficient use of information. That mission is achieved through collaborations among researchers across the scientific spectrum and dissemination of knowledge through conferences, workshops and seminars as well as through short-term, hands-on classes at the graduate and post-graduate level.

The Institute was established in August 2009

The OCC supervises and regulates many of the largest banks in the country. Those banks use increasingly complex modeling techniques in an ever wider range of applications, from credit scoring for credit cards and mortgages, to pricing of structured financial products and other derivative instruments, to models that identify suspicious transactions to fight money laundering. OCC modeling experts evaluate these bank models to verify that they are not being used in ways that might threaten the health of the banking system. Often we encounter issues or questions that are not adequately addressed in the existing literature, and therefore require research. We do some of that research ourselves, but we also reach out to the broader research community – including scholars associated with this Institute – for ideas and possible answers.

The OCC sees the Info-Metrics Institute as a particularly timely initiative, and one that likely will produce real value for our agency and for the public we serve. Those expectations certainly have been met in the Institute’s inaugural year; we have been pleased to be able to support the Institute, and look forward to its continued success in the year ahead.

- Mark Levonian, Senior Deputy Comptroller, Office of the Comptroller of the Currency

Info-Metrics Institute Fall 2010 Newsletter 2

Info-Metrics Institute and the OCC: Working Together to Serve the Public The Office of the Comptroller of the Currency (OCC) has been actively involved with the Info-Metrics Institute on several levels throughout its first year of existence. The OCC views the Institute as well positioned to make meaningful contributions to the agency’s ability to carry out its mission of ensuring a safe and sound national banking system; the activities of the Institute touch on multiple elements of the OCC’s regulatory work.

In Memoriam: Arnold Zellner (1927 – 2010)

Arnold Zellner, a founding member of the Info-Metrics Institute, passed away on August 11, 2010. Arnold was one of the world’s leading econometricians and a kind and generous person. His work on Bayesian econometrics, statistics, system of equations, and entropic inference opened the door on new ways to understand data. Summaries of Arnold’s contributions can be found on the Web pages of the University of Chicago and UC–Berkeley. We will miss you, Arnold.

A Message from the Advisory Board ChairThe development of the Info-Metrics Institute offers great potential for the application of state-of-the-art methods. As an economist who first became familiar with entropy concepts when analyzing income inequality, I generally focus on economic applications, such as distributional issues, industry studies, and finance. Yet, equally exciting is the cross-fertilization of ideas coming from disciplines outside economics. We hope and believe the Institute will become one of the rare places in academia where serious scholars will learn from each other, engage in intellectual arbitrage, and thereby widen their perspectives on using data to make progress on real-world problems in the natural and social sciences.

- Robert Lerman, Chair, Info-Metrics Institute Advisory Board

Info-Metrics Institute Fall 2010 Newsletter3

Our Work – Expanding the Frontiers of Research Following is a sampling of the research agenda of some of the Institute’s affiliates. More information, including a detailed research agenda for each of our Affiliates, can be found in the 2009-10 Info-Metrics Institute Annual Report and on our website.

Audience members at the Institute’s inaugural workshop in November 2009

Pieter Adriaans (University of Amsterdam) • Exploring facticity as a measure for meaningful

information• Achieving a unified theory of entropy, computation and

information

Anil Bera (University of Illinois – Urbana-Champaign)• Developing information theoretic approaches to density

estimation with applications to finance and income distribution

• Investigating the interface between spatial analysis and entropy, leading to the thermodynamics of population concentration in big cities

James Bono (American University)• Using the maximum entropy principle to infer the

strategies of economic agents without assumptions on rationality or common knowledge

• Applying ideas from information theory and game theory to mediation and peace negotiations

Mehmet Caner (NC State University)• Violation of exogeneity in an instrumental variable

regression framework• Joint testing of structural parameter and the correlation

between instrument and the errors•

Ariel Caticha (SUNY - Albany)• Applying entropic principles to thermodynamics and

statistical mechanics• Testing an entropic approach to economic modeling by

focusing attention on simple models of highly idealized economies

Duncan Foley (New School for Social Research and Santa Fe Institute)

• Application of statistical cluster analysis to images of the supra-chiasmatic nucleus (the locus of circadian rhythms in mammals)

• Study of two-part coding in the process of theory choice within a Bayesian framework

• Political economy of post-crisis global capitalism

Ramo Gencay (Simon Fraser University)• Testing the presence of serial correlation in a stochastic

process using a wavelet approach

John Geweke (UTS - Sydney)• Time series analysis and Bayesian modeling of economic

theory

The Info-Metrics Institute thanks our primary sponsor: the Office of the Comptroller of the Currency. We also greatly appreciate the support we have received from the College of Arts and Sciences and the Department of Economics at American University.

• Determining the posterior modal subjective probability distribution of an indifferent trader in prediction markets

Amos Golan (American University)• Connecting theory, observable data and information processing

into a unified framework of inference• Information theory, information processing and optimal

decision rules based on efficient use of information

Alastair Hall (University of Manchester) • Estimation of the parameters of economic and statistical

models based on the information in moment conditions • Generalized Method of Moments, including moment selection,

structural stability testing, inference in misspecified models and non-nested model comparison

George Judge (University of California - Berkeley)• Unifying entropy functionals and applying them to information

theory• Identifying an appropriate flexible parametric family and

corresponding statistical models and estimators for binary response models

Yuichi Kitamura (Yale University)• Incorporating Bayesian methods in semiparametric models

using Information-Theoretic techniques• Investigating applications of nonparametric Bayesian methods

in moment restriction models, where information theory plays an essential role

Raphael Levine (The Hebrew University)• Fundamental principles of Information Theory and entropic

inference across the sciences• Applying information theory to molecular reaction dynamics• Exploring the maximal entropy inference of oncogenicity

Info-Metrics Institute Fall 2010 Newsletter4

Robin Lumsdaine (American University)• Exploring the relationship between financial market

perceptions and reality, and the role of news and information in shaping those perceptions

• Studying the relationship between news attention and equity performance, questioning conventional wisdom related to the inflation-linked bond market

Esfandiar Maasoumi (Emory University)• Employing nonparametric identification of aggregator

functions to characterize and rank the multidimensional distribution of indicators of well being

• Developing a more general approach to "matching" in program evaluation and treatment effect contexts via Info-Metrics

Jeffrey Perloff (University of California - Berkeley)• Developing a new Information-Theoretic approach for

estimating a demand system that takes account of zeroes, using the choke price and not the observed price for those who do not purchase

M. Hashem Pesaran (Cambridge University)• Exploring econometric analysis of heterogeneous panels

with spatial and common unobserved effects, panel unit root tests in the presence of error cross section dependence, global macroeconometric modelling, analysis of growth and convergence, and time series forecasting

Upcoming Events*

• Spring 2011 Info-Metrics Workshop: Info-Metrics Across the SciencesMay 2, 2011 – American University

• Fall 2011 Info-Metrics Workshop: Philosophy of InformationOctober 3, 2011 – American University

• Spring 2012 Info-Metrics Workshop: Information and Econometrics of NetworksMarch 30-31, 2012 – American University The Institute thanks Bethany Hardy (http://bethanyhardy.com) and

Aisha Malik for their help in producing this newsletter.

Check out our website for updates on the Institute’s work and upcoming events.

Bookmark our site and visit often!

www.american.edu/info-metrics

Institute Fellows Seminars: Spring 2010*

Jeffrey S. Racine“Entropy in Hypothesis Testing: Review and Applications”

Anil Bera“Spacial Analysis and Entropy”

Ariel Caticha“Quantifying Rational Belief - Probability”

“Updating Probabilities - Entropy”“Measuring Distinguishability - Information Geometry”

Esfandiar Maasoumi and Jeffrey S. Racine“Info-Metrics: Research Summary and Q & A with

Students”

Dennis Glennon“Estimating Transition Matrices of Rated Syndicated Loans

Using an Information Theoretic Approach”

Eric Renault (University of North Carolina)• Moment selection through implied probabilities and

efficient use of conditional moment restrictions in the context of time series with applications to efficient pricing of financial derivatives

• Relationships between Information-Theoretic approaches to General Method of Moments (GMM) and Bayesian Method of Moments

Michael Stutzer (University of Colorado - Boulder)• Exploring entropy-based estimation models, including the

estimation of risk-neutra probabilities needed for derivative security valuation, and the estimation of parameters in econometric models amenable to GMM estimation

David H. Wolpert (NASA Ames Research Center)• Exploring quantifications of self-dissimilarity that can be

measured for many kinds of real-world data• Investigating a Bayesian approach to formulating distribution-

valued concepts in predictive game theory

Ximing Wu (Texas A&M University)• Exploring use of the maximum entropy density method for

multivariate density estimation nonparametrically• Applying information-theoretic methods to inferences

*Visit our website for more information.

Duncan Foley, Nick Kiefer, and Pieter Adriaans in a panel discussion at the Spring 2010 Workshop