Chapter 19. Forecasting Binary Outcomes

Binary events are involved in many economic decision problems. In recent years, considerable progress has been made in diverse disciplines in developing models for forecasting binary outcomes. We distinguish between two types of forecasts for binary events that are generally obtained as the output of regression models: probability forecasts and point forecasts. We summarize specification, estimation, and evaluation of binary response models for the purpose of forecasting in a unified framework that is characterized by the joint distribution of forecasts and actuals, and a general loss function. Analysis of both the skill and the value of probability and point forecasts can be carried out within this framework. Parametric, semi-parametric, non-parametric, and Bayesian approaches are covered. The emphasis is on the basic intuitions underlying each methodology, abstracting away from the mathematical details.