Comovements in Military Spending: Evidence from a Dynamic Factor Model with Time-Varying Stochastic Volatility

This study examines the trend and comovements of military expenditures across 70 countries from 1967 to 2018. While previous research recognizes the degree of cross-correlations using principal components analysis, we adopt a dynamic factor model with time-varying stochastic volatility to examine the trend and comovements in military spending. Specifically, the dynamic factor model allows us to partition the trend of military spending into global, regional, and country-specific components. We find significant evidence of the global factor that explains a considerable portion of the variation in military spending across countries. Moreover, our findings reveal a significant time variation in the importance of the global factor. We also show the presence of regional and country-specific factors in the military spending of countries, but the importance of the regional factor is less than that of the global and country-specific factors. Additionally, we find that countries under consideration are becoming less exposed to global influences with respect to their decisions in military spending over time.