We define a factor to be global if it is constructed from the global capital mar- ket, and we define a factor to be regional if it is constructed only from the rele- vant regional market. In this paper, we consider three regions: North America, Europe, and the Far East. Many articles (see for instance, Bekaert and Harvey (1995) and Baele (2005)) have noted that the market integration process may not proceed smoothly. Therefore, maximum f lexibility in the model with regard to the importance of global versus regional factors is necessary. This general model allows time-varying exposures to global and regional factors, potentially capturing full or partial.
