Binary choice models occur frequently in economic modeling. A measure of the predictive performance of binary choice models that is often reported is the hit rate of a model. This paper develops a test for the outperformance of a predictor for binary outcomes over a naive prediction method, which predicts the outcome that is most often observed. This is done for a general class of prediction models, including the well known Probit and Logit models. In many cases the test is easy to compute. The test is then applied and compared to a general test of Pesaran and Timmermann (1992) for dependence between predictors and realizations.
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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number
254.
Find related papers by JEL classification: C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
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