Testing for bias in forecasts for independent binary outcomes

ABSTRACT

This letter deals with a test on forecast bias in predicting independent binary outcomes, where the outcomes are either 1 or 0, and the predictions are probabilities. The test concerns two parameter restrictions in a simple logit model. Size-corrected power experiments show remarkable power.

KEYWORDS:

• Binary outcomes
• Probability forecasts
• Forecast bias
• Logit model

JEL CODES:

• C25
• C53

Acknowledgments

Thanks to Richard Paap for helpful comments and Max Welz for programming.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ There are tests on the so-called hit rate, that is the fraction of correctly predicted 1 and 0 observations, but that concerns another feature of the forecasts.