For me another really interesting application would be measuring connectedness in financial markets, as a way of tracking systemic risk. The Diebold-Yilmaz (DY) connectedness framework is based on a high-dimensional VAR with time-varying coefficients, but not factor structure. An obvious alternative in financial markets, which we used to discuss a lot but never pursued, is factor structure with time-varying loadings, exactly in Pelger!
It would seem, however, that any reasonable connectedness measure in a factor environment would need to be based not only time-varying loadings but also time-varying idiosynchratic shock variances, or more precisely a time-varying noise/signal ratio (e.g., in a 1-factor model, the ratio of the idiosyncratic shock variance to the factor innovation variance). That is, connectedness in factor environments is driven by BOTH the size of the loadings on the factor(s) AND the amount of variation in the data explained by the factor(s).
Typically one might fix the factor innovation variance for identification, but allow for time-varying idiosyncratic shock variance in addition to time-varying factor loadings. It seems that Pelger’s framework does allow for that. Crudely, and continuing the 1-factor example, consider y_t = lambda_t f_t + e_t. His methods deliver estimates of the time series of loadings lambda_t and factor f_t, robust to heteroskedasticity in the idiosyncratic shock e_t. Then in a second step one could back out an estimate of the time series of e_t and fit a volatility model to it.
Then the entire system would be estimated and one could calculate connectedness measures based on variance decompositions as in the DY framework.