risk models has covered both the local and global frameworks. We now turn our attention to global equity factor risk models. In this discussion, "global equity" refers to equities traded in markets covering North America, South America, Continental Europe, the United Kingdom, Japan, and the Pacific Rim. A global equity portfolio consists of equities that are traded in two or more of these regions. In principle, global equity can include any equity market. A global equity risk factor model involves a set of factors that can explain the risk in a portfolio that contains global equities. Global equity factor models pose an important problem for portfolio managers because it is relatively difficult to define a set of factors that can describe the variation in a portfolio that consists of global equities. This is particularly the case when the global equity portfolio has pockets of concentrations. For example, a portfolio that consists of concentrations in exposures to Japanese and U.S. stocks requires a large amount of factors to properly describe its risk. One set of factors is needed to describe Japanese stocks, while another set of factors is needed to describe the U.S. stocks. Furthermore, we may consider a third set of factors to cover the covariation among the Japanese and U.S. stocks. Ideally, we would seek a smaller number of global factors to describe the risk; however, this set may be difficult to identify in practice. Before we turn our attention to modeling global equity, we provide an overview of some research that has recently taken place on international equity models. This research has implications for building global equity factor models. Country and Industry Effects Understanding the relative importance of country and industry effects has been an area of great interest among global equity portfolio managers. Historically, global equity management has been structured around country allocation. A two-step procedure is typically employed, with the first step being country allocation and the second the selection of industries and stocks within these countries. The reason for the emphasis on country allocation stems from the belief that it is better to diversify among countries. From a statistical perspective, this belief is based on the empirical finding of low correlations among countries.16 Researchers and practitioners offer three explanations as to why correlation among country returns is relatively low compared to correlation among industry returns. 1. Home bias or investor myopia. Instead of diversifying across all markets and holding a portfolio that mirrors the world portfolio, investors have historically strongly overweighted domestic securities in their portfolios. Country portfolios may in part reflect different sentiment among local residents, and investor sentiment varies from country to country. Home bias is often reinforced by regulatory constraints that require certain types of investors to hold their assets primarily, or even exclusively, in their home markets. This is true, for example, lsHolding all other things equal, the lower the correlation among assets, the greater the diversification benefit.