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The volatility of tourism demand and real effective exchange rates: a disaggregated analysis

The volatility of tourism demand and real effective exchange rates: a disaggregated analysis One of the main factors that can impact the cost of holidays to a particular destination is the exchange rate; exchange rate fluctuations impact the overall price of the holiday and should be expected to effect tourism demand. This paper aims to scrutinize the volatility of the real effective exchange rate between the source market relative to the holiday destination and tourism demand volatility, where the influence of disaggregated data is noted.Design/methodology/approachThe study uses multivariate conditional volatility regressions to simulate the time-varying conditional variances of international visitor demand and exchange rates for the relatively mature Caribbean tourist destination of Barbados. Data on the country’s main source markets, the UK, the USA and Canada is used, where the decision to disaggregate the analysis by market allows the authors to contribute to policymaking, particularly the future of tourism marketing.FindingsThe volatility models used in the paper suggests that shocks to total arrivals, as well as the USA and UK markets tend to die out relatively quickly. Asymmetric effects were observed for total arrivals, mainly due to the combination of the different source markets and potential evidence of Butler’s (1980) concept of a tourist area’s cycle of growth. The results also highlight the significance of using disaggregated tourism demand models to simulate volatility, as aggregated models do not adequately capture source market specific shocks, due to the potential model misspecification. Exchange rate volatility is postulated to have resulted in the greater utilization of packaged tours in some markets, while the effects of the market’s online presence moderates the impact of exchange rate volatility on tourist arrivals. Markets should also explore the potential of attracting higher numbers of older tourist, as this group may have higher disposable incomes, thereby mitigating the influence of exchange rate volatility.Research limitations/implicationsSome of the explanatory variables were not available on a high enough frequency and proxies had to be used. However, the approach used was consistent with other papers in the literature.Practical implicationsThe results from the paper suggest that the effects of exchange rate volatility in key source markets were offset by non-price factors in some markets and the existence of the exchange rate peg in others. In particular, the online presence of the destination was one of those non-price factors highlighted as being important.Originality/valueIn most theoretical models of tourism demand, disaggregation is not normally considered a significant aspect of the model. This paper contributes to the literature by investigating the impact real effective exchange rate volatility has on tourism demand at a disaggregated source country level. The approach highlights the importance of modeling tourism demand at a disaggregated level and provides important perspective from a mature small island destination. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Tourism Review Emerald Publishing

The volatility of tourism demand and real effective exchange rates: a disaggregated analysis

Tourism Review , Volume 76 (2): 14 – Mar 25, 2021

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References (36)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1660-5373
DOI
10.1108/tr-09-2019-0373
Publisher site
See Article on Publisher Site

Abstract

One of the main factors that can impact the cost of holidays to a particular destination is the exchange rate; exchange rate fluctuations impact the overall price of the holiday and should be expected to effect tourism demand. This paper aims to scrutinize the volatility of the real effective exchange rate between the source market relative to the holiday destination and tourism demand volatility, where the influence of disaggregated data is noted.Design/methodology/approachThe study uses multivariate conditional volatility regressions to simulate the time-varying conditional variances of international visitor demand and exchange rates for the relatively mature Caribbean tourist destination of Barbados. Data on the country’s main source markets, the UK, the USA and Canada is used, where the decision to disaggregate the analysis by market allows the authors to contribute to policymaking, particularly the future of tourism marketing.FindingsThe volatility models used in the paper suggests that shocks to total arrivals, as well as the USA and UK markets tend to die out relatively quickly. Asymmetric effects were observed for total arrivals, mainly due to the combination of the different source markets and potential evidence of Butler’s (1980) concept of a tourist area’s cycle of growth. The results also highlight the significance of using disaggregated tourism demand models to simulate volatility, as aggregated models do not adequately capture source market specific shocks, due to the potential model misspecification. Exchange rate volatility is postulated to have resulted in the greater utilization of packaged tours in some markets, while the effects of the market’s online presence moderates the impact of exchange rate volatility on tourist arrivals. Markets should also explore the potential of attracting higher numbers of older tourist, as this group may have higher disposable incomes, thereby mitigating the influence of exchange rate volatility.Research limitations/implicationsSome of the explanatory variables were not available on a high enough frequency and proxies had to be used. However, the approach used was consistent with other papers in the literature.Practical implicationsThe results from the paper suggest that the effects of exchange rate volatility in key source markets were offset by non-price factors in some markets and the existence of the exchange rate peg in others. In particular, the online presence of the destination was one of those non-price factors highlighted as being important.Originality/valueIn most theoretical models of tourism demand, disaggregation is not normally considered a significant aspect of the model. This paper contributes to the literature by investigating the impact real effective exchange rate volatility has on tourism demand at a disaggregated source country level. The approach highlights the importance of modeling tourism demand at a disaggregated level and provides important perspective from a mature small island destination.

Journal

Tourism ReviewEmerald Publishing

Published: Mar 25, 2021

Keywords: Tourism; United Kingdom; Exchange rate; Brexit; online presence; Demand volatility; Small island tourism economies; Volatility of demand; Market-specific behavior; Price competitiveness; Tour packages; Currency fluctuations; United States; Canada; 旅游业; 汇率; 需求波动; 线上影响; 小岛旅游经济体; 价格竞争力; Turismo; Tipo de cambio; Volatilidad de la demanda; Economías pequeñas de turismo isleño; Brexit; Comportamiento específico del mercado; Competitividad de precios; Paquetes turísticos; Presencia en línea; Fluctuaciones monetarias; Reino Unido; Estados Unidos; Canadá; Reino Unido; Estados Unidos; Canadá

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