Geopolitical Risk and Tourism Stocks of Emerging Economies

• Published in: Sustainability 2020-11, Vol.12 (21), p.9261
• Main Authors: Hasan, Mudassar, Naeem, Muhammad Abubakr, Arif, Muhammad, Shahzad, Syed Jawad Hussain, Nor, Safwan Mohd
• Format: Article
• Language: English
• Subjects: Causality; Economic conditions; Emerging markets; Geopolitics; Institutional investments; International relations; Macroeconomics; Securities markets; Stock exchanges; Sustainability; Terrorism; Time series; Tourism
• ISSN: 2071-1050; 2071-1050
• DOI: 10.3390/su12219261

A bulk of literature suggests that geopolitical events such as terrorist attacks dampen tourism demand. However, there is little research on whether this effect helps predict the return of the tourism equity sector. We provide country-level evidence on whether local and global geopolitical risk (GPR) predicts the first and second moments of tourism stocks in emerging economies. This objective was achieved by employing the non-parametric causality-in-quantiles (CiQ) model and a cross-quantilogram (CQ) test, which allowed us to uncover the predictive potential of GPR for the tourism sector equities. Our findings, obtained through the CiQ model, suggest that while both local and global GPRs carry significant potential for predicting the returns and volatility of tourism stocks of most emerging economies under normal market conditions, they seem to play no such role in certain countries. These countries include South Korea, for which only a limited number of tourism stocks trade on the domestic stock market compared to other sectors, and Colombia, for which both the domestic stock market and tourism sectors are at an emerging stage. Further, it turns out that, compared to its local counterpart, global GPR has a more pronounced predictive power for the tourism stocks of emerging economies. Finally, with some exceptions, the results are qualitatively similar, and hence reasonably robust, to those when a directional predictability model is applied. Given that geopolitical shocks are largely unanticipated, our findings underscore the importance of a robust tourism sector that can help the market recover to stability as well as an open economy that allows local investors to diversify country-specific risks in their portfolios. Implications and directions for future research are discussed.