Brexit uncertainty and volatility persistence in tourism demand

ABSTRACT

Tourism has emerged as one of the leading components of aggregate economic growth in most developed economies, especially in the UK, where it is predicted to grow at an annual rate of 3.8% through 2025. Because tourism demand represents individuals’ choice between leisure and work, a persistence of negative shocks, such as Brexit uncertainty, can be detrimental to the growth of tourism via its impact on agents’ utility function of a directed consumption of leisure for a specific country. This note fills a gap in the literature by providing an econometric estimate of time-varying volatility in tourism demand following Brexit-driven Economic Policy Uncertainty. Using seasonally adjusted and trend-extracted tourist arrival series along with Brexit uncertainty, we find a strong evidence of long-run persistence in (asymmetric) volatility in tourist arrival. In particular, the BREXIT referendum appeared to create ambiguity among international visitors to the UK. Our results have important policy implications.

KEYWORDS:

• Tourism demand
• asymmetric GARCH
• structural breaks
• volatility persistence
• Brexit
• Hamilton filter

Acknowledgement

We are enormously thankful to two referees whose intuitive comments and step by step guidance to resolving some of the technical issues have significantly improved the quality of the work. We are grateful for their patience. We are also grateful to the editor for his valuable feedback and patience. We are solely responsible for any remaining errors and omissions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Thanks to an anonymous referee for suggesting this estimation.

2 All the data are sourced from Thomson Reuters DataStream database.

3 Our results from adjusted (de-seasonalized and trend extracted) data produce similar conclusions. Results are not reported here due to lack of space but are available with the authors.

4 Thanks to an anonymous referee for suggesting this estimation to lend robustness to our results.

Additional information

Funding

This work was supported by Jan Wallanders och Tom Hedelius Stiftelse samt Tore Browaldhs Stiftelse.