Testing predictive performance of binary choice models
2002-02-07
Research Paper
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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.
Keywords
Automatically Extracted Terms
- model
- sample
- prediction
- insurance
- performance
- predictor
- dependence
- assumption
- validation sample
- prediction model
- estimation sample
- distribution
- test statistic
- statistic
- predictor dependence
- estimation
- customer
- limit distribution
- validation
- choice models
