Modelling the Volatility in Country Risk for Small Island Tourism Economies

Small Island Tourism Economies (SITEs) differ significantly in their size, location, political systems, historical experience, economic prospects, ecological fragility, and vulnerability to ethnic conflicts, crime, and the threat of global terrorism. Given these differences, a careful analysis of country risk and its components for the SITEs is of great interest to private tourism operators and foreign direct investors in the tourism and hospitality industry, tourism commissions and governments. This paper provides a comparison of country risk ratings, risk returns and associated volatilities for six SITEs for which monthly data compiled by the International Country Risk Guide are available. Monthly economic, financial, political and composite country risk returns are used to estimate symmetric and asymmetric models of univariate conditional volatility. The empirical results provide a comparative assessment of the conditional means and volatilities associated with country risk returns across the six SITEs.