This paper proposes a novel multivariate regime switching model that allows the threshold variable to be a linear combination of covariates with unknown coefficients: the model is likely to be more suitable to analyze time series of data in which regimes dynamics are driven by multiple...

This paper studies the empirically relevant problem of estimation and inference in diffusion index forecasting models with structural instability. Factor model and factor augmented regression both experience a structural change with different unknown break dates. In the factor model, we estimate...

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...

We propose a conditional model of asset returns in the presence of common factors and downside risk. Specifically, we generalize existing latent factor models in three ways: we show how to estimate the threshold which identifies the 'disappointment' event triggering the bad state of the world; we...

We develop a new test for threshold-type regime changes in the risk exposures in portfolios with a large number of financial assets whose returns exhibit an approximate factor structure. Unlike existing procedures to detect discrete shifts in factor models, our test is robust to regime-specific...