Modelling dependence between tourism demand and exchange rate using the copula-based GARCH model

Abstract

This paper investigates dependence between tourism demand and exchange rate, using the case of China, and from a new perspective by using copula–GARCH models. The empirical results show that the volatility of exchange rate is not a determinant factor in fluctuation of China's inbound tourism demand from the countries being studied. Furthermore, only Russia exhibits risk-adverse behaviour with extreme SUR depreciation, or CNY appreciation associated with an extreme decline in arrivals. Third, introducing the tail dependence and dynamic dependence between growth rates of tourism demand and exchange rate add much to the explanatory ability of the model. The findings of this study have important implications for destination manager and travel agent as it helps to understand the impact of exchange rates on China inbound tourism demand and provide a complementary academic approach on evaluating the role of exchange rates in the international tourism demand model.