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Predicting binary outcomes

2013; Elsevier BV; Volume: 174; Issue: 1 Linguagem: Inglês

10.1016/j.jeconom.2013.01.003

1872-6895

Graham Elliott, Robert P. Lieli,

Financial Risk and Volatility Modeling

We address the issue of using a set of covariates to categorize or predict a binary outcome. This is a common problem in many disciplines including economics. In the context of a prespecified utility (or cost) function we examine the construction of forecasts suggesting an extension of the Manski, 1975, Manski, 1985 maximum score approach. We provide analytical properties of the method and compare it to more common approaches such as forecasts or classifications based on conditional probability models. Large gains over existing methods can be attained when models are misspecified.