International Demand and Country Risk Analysis
The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Chapter 5: Models of Symmetric and Asymmetric Conditional Volatility: Structure, Asymptotic Theory and Applications to Tourism Demand
5.1 INTRODUCTION Over the last 20 years, there has been concern among many economists, practitioners and academics regarding the volatility in asset returns. The future is uncertain and investors do not know with certainty whether the economy will be growing rapidly or experiencing a recession. As such, they do not know what rate of return their investments will yield. Therefore, decisions are based on expectations about the future. The expected rate of return on a stock represents the mean of the probability distribution of possible future returns. The volatility of the expected return on an asset is defined as the square of the deviation from the mean of the expected return of the asset during any given period. There are several reasons why we need to model and forecast the volatility in international tourist arrivals or country risk returns. First, governments as well as tour operators need to examine the underlying uncertainty that is intrinsic in the total number, as well as in the growth rate, of international tourist arrivals. Similarly, investors need to analyse the riskiness in investing in SITEs, through an analysis of the volatility in country risk returns. Second, in the time series econometrics literature it is widely believed that the forecast confidence interval is time varying. Therefore, more accurate confidence intervals can be obtained by modelling the conditional variance of the errors. Finally, if the heteroscedasticity in the errors is carefully examined and modelled accurately, more efficient estimators of the parameters in the conditional mean can...
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