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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Econometric Institute Research Papers
Erasmus School of Economics

Donkers, A.C.D, & Melenberg, B. (2002). Testing predictive performance of binary choice models (No. EI 2002-01). Econometric Institute Research Papers. Retrieved from