A Combined Analytic Hierarchy Process and Goal Programming Approach to International Portfolio Selection in the Presence of Investment Barriers

The aim of this paper is to develop an integrated multiple criteria decision making approach combining the analytic hierarchy process (AHP) and the goal programming (GP) model to study the impact of a mixture of investment barriers on international portfolio selection, and therefore the home bias puzzle from the view point of G-7 investors over the period 2001-2009. The AHP is used to determine the suitable international equity portfolios with respect to seven barriers to international investment: Information costs, investor behavior (optimism or pessimism toward financial market returns), geographical distance, transaction costs, expropriation risk, financial market size, and capital flow restrictions. The GP model, incorporating the market weights of the maximum return, minimal variance, and AHP portfolios is formulated to determine the optimal international equity portfolios. The main results show that the AHP-GP optimal international portfolio weights are different from those predicted by the I-CAPM. Also, except for French and US investors, home bias values determined according to the AHP-GP portfolios are lower than those calculated on the basis of the value weighted market portfolio. Hence, a combined AHP-GP model, as a more realistic approach to international portfolio selection, confirms the presence of the home bias and that this bias is generally less important than that obtained by applying a traditional approach