Systematic Comovement in Threshold Group-Factor Models

Abstract

We study regime-specific 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 define 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 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 comovement between regimes. The empirical analysis of two large panels of U.S. and international equity returns shows that their comovement increases when U.S. macroeconomic uncertainty is sufficiently high.