Systematic Comovement in Threshold Group-Factor Models

67 Pages Posted: 18 May 2021 Last revised: 15 Dec 2021

See all articles by Daniele Massacci

Daniele Massacci

King's College London

Mirco Rubin

EDHEC Business School

Dario Ruzzi

Bank of Italy

Date Written: December 15, 2021

Abstract

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 define as \systematic" the comovement
that is generated by the common components of the variables. 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 sufficiently high.

Keywords: Comovement, Approximate Factor Model, Groups, Threshold, PCA

JEL Classification: C12, C24, C38, C55, F39

Suggested Citation

Massacci, Daniele and Rubin, Mirco and Ruzzi, Dario, Systematic Comovement in Threshold Group-Factor Models (December 15, 2021). Available at SSRN: https://ssrn.com/abstract=3846062 or http://dx.doi.org/10.2139/ssrn.3846062

Daniele Massacci

King's College London ( email )

United Kingdom

Mirco Rubin (Contact Author)

EDHEC Business School ( email )

393 Promenade des Anglais
Nice, 06200
France

Dario Ruzzi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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