GC 21/01: Systematic comovement in threshold group-factor models

Summary

We study regime-specific systematic comovement between two large panels of variables that exhibit an approximate factor structure. Within each panel, we identify threshold-type regimes through shifts in the factor loadings. For the resulting regimes, and with regard to the relation between any two variables in different panels, we definene as 'systematic' the comovement that is generated by the common components of the variables. In our setup, changes in comovement are identified by regime shifts in the loadings. After constructing measures of systematic comovement between the two panels, we propose estimators for these measures and derive their asymptotic properties. We develop inferential procedures to formally test for changes in systematic comovement between regimes. The empirical analysis of two large panels of U.S. and international equity returns shows that their systematic comovement increases when U.S. macroeconomic uncertainty is high as determined by our estimation procedure.

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Authors

Daniele Massacci, Dario Ruzzi and Mirco Rubin

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