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The model accommodates time\u2010varying correlations, heterogeneous heavy tails, and dependent idiosyncratic shocks. Applied to a Small Universe of 12 assets and a Large Universe of 323 stocks, the factor structure induces a sparse idiosyncratic correlation matrix with dependencies concentrated within subindustries, enabling scalability to high dimensions under a sparse block structure. Both factor loadings and correlations vary substantially. Allowing for heterogeneous heavy tails via convolution\u2010 distributions yields sizable improvements relative to Gaussian and multivariate\u2010 benchmarks.<\/jats:p>","DOI":"10.1002\/jae.70062","type":"journal-article","created":{"date-parts":[[2026,5,2]],"date-time":"2026-05-02T01:16:19Z","timestamp":1777684579000},"page":"580-596","update-policy":"https:\/\/doi.org\/10.1002\/crossmark_policy","source":"Crossref","is-referenced-by-count":0,"title":["Dynamic Factor Correlations"],"prefix":"10.1002","volume":"41","author":[{"given":"Chen","family":"Tong","sequence":"first","affiliation":[{"name":"Department of Finance, School of Economics Xiamen University  China"},{"name":"Wang Yanan Institute for Studies in Economics Xiamen University  China"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Peter","family":"Reinhard Hansen","sequence":"additional","affiliation":[{"name":"Department of Economics University of North Carolina  Chapel Hill North Carolina USA"}],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"311","published-online":{"date-parts":[[2026,5,1]]},"reference":[{"key":"e_1_2_11_2_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeconom.2017.08.015"},{"key":"e_1_2_11_3_1","doi-asserted-by":"publisher","DOI":"10.1155\/2023\/9967290"},{"key":"e_1_2_11_4_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeconom.2024.105743"},{"key":"e_1_2_11_5_1","doi-asserted-by":"publisher","DOI":"10.3982\/ECTA16910"},{"key":"e_1_2_11_6_1","doi-asserted-by":"publisher","DOI":"10.1162\/rest_a_01258"},{"key":"e_1_2_11_7_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeconom.2025.106040"},{"key":"e_1_2_11_8_1","doi-asserted-by":"publisher","DOI":"10.1093\/jjfinec\/nbae018"},{"key":"e_1_2_11_9_1","doi-asserted-by":"publisher","DOI":"10.1016\/0304-4076(86)90063-1"},{"key":"e_1_2_11_10_1","doi-asserted-by":"publisher","DOI":"10.1111\/j.1540-6261.1997.tb03808.x"},{"key":"e_1_2_11_11_1","doi-asserted-by":"publisher","DOI":"10.1002\/jae.1279"},{"key":"e_1_2_11_12_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeconom.2015.03.027"},{"key":"e_1_2_11_13_1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jeconom.2018.09.005"},{"key":"e_1_2_11_14_1","doi-asserted-by":"publisher","DOI":"10.1080\/07350015.2011.652048"},{"key":"e_1_2_11_15_1","doi-asserted-by":"publisher","DOI":"10.1017\/S0266466600009063"},{"key":"e_1_2_11_16_1","doi-asserted-by":"publisher","DOI":"10.2307\/1912773"},{"key":"e_1_2_11_17_1","doi-asserted-by":"publisher","DOI":"10.1198\/073500102288618487"},{"key":"e_1_2_11_18_1","doi-asserted-by":"publisher","DOI":"10.1080\/07350015.2015.1052458"},{"key":"e_1_2_11_19_1","volume-title":"Data Library","author":"French K. 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