The impact of third-country exchange rate risk on international air travel flows: The case of Korean outbound tourism demand

Abstract

While the relationship between exchange rate risk and trading activity has been studied extensively, little attention has been paid to assessing exchange rate volatility in a travel demand model. This paper aims to examine the short- and long-run effects of real income, population, exchange rate, and exchange rate volatility on tourist flows from South Korea to Japan, Philippines, Singapore, Taiwan, and the US. To analyze the impacts of third-country exchange rate risk factors, this study takes into consideration two measures of real exchange rate volatility: the GARCH-based measure and the standard deviation of real exchange rates. The long-run results show that income growth in South Korea is driving the rising number of Korean outbound tourists, while real exchange rate has little impact on outbound tourism demand in South Korea. More importantly, the third-country effects of exchange rate volatility are found to be significant for the selected tourism destinations. An increase in third-country exchange rate risk tends to have a positive impact on Korean outbound tourism demand for the selected destinations, indicating that risk-averse Korean outbound tourists choose destinations where exchange rates are less volatile compared to destinations where they are more volatile. This study also finds evidence that Korean outbound tourists are less responsive to third-country exchange rate risk in the short run.