Modeling Barriers to International Capital Flows: A Multicountry Framework

To explain the bias in favor of domestic securities known as the “international diversification puzzle,” the literature has considered many possible irritants of capital movements across national boundaries but the results remain inconclusive. This paper demonstrates that this complex multivariate problem can be addressed within an analytic hierarchy process (AHP)-driv en expert system. The AHP can be modeled to select an optimal investment portfolio (OIP), herein a multinational portfolio composed of national markets where barriers to capital flows are least likely to adversely affect its return. Experts examined these barriers in relation to six national markets and the euro...