International Portfolio Choices with Investment Barriers : A Multifactor Approach

The purpose of this paper is to study the portfolio choice problem in the presence of a mixture of barriers to international investment from the view point of G-7 investors. We suggest a methodology based on a combination of the Analytic Hierarchy Process (AHP) and the weighted goal programming model. Seven barriers to international diversification have been considered: Information costs, investor behavior, geographical distance, transaction costs, expropriation risk, market size, and capital flow restrictions. Results show diverse AHP-goal programming portfolios according to the relative weight allowed to the barriers of international investment in the objective function. Also, except for US investors, domestic bias according to the AHP-GPP are lower than those calculated on the basis of the weighted capital market portfolios. Hence, a combined AHP-goal programming model can explain some of the home bias effect but it is not sufficient to explain the degree of the home bias observed in investor portfolios