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Binary Response Forecasting under a Factor-Augmented Framework

Author

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  • Tingting Cheng
  • Jiachen Cong
  • Fei Liu
  • Xuanbin Yang
Abstract
In this paper, we propose a novel factor-augmented forecasting regression model with a binary response variable. We develop a maximum likelihood estimation method for the regression parameters and establish the asymptotic properties of the resulting estimators. Monte Carlo simulation results show that the proposed estimation method performs very well in finite samples. Finally, we demonstrate the usefulness of the proposed model through an application to U.S. recession forecasting. The proposed model consistently outperforms conventional Probit regression across both in-sample and out-of-sample exercises, by effectively utilizing high-dimensional information through latent factors.

Suggested Citation

  • Tingting Cheng & Jiachen Cong & Fei Liu & Xuanbin Yang, 2025. "Binary Response Forecasting under a Factor-Augmented Framework," Papers 2507.16462, arXiv.org.
    • Handle: RePEc:arx:papers:2507.16462
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    File URL: http://arxiv.org/pdf/2507.16462
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