Combining volatility and smoothing forecasts of UK demand for international tourism

Univariate volatility models are applied to UK tourism demand to the countryʹs most popular international destinations. Volatility is a concept borrowed from Finance. The fact that significant volatility models are found for ten of the twelve destinations examined shows that the volatility concept has relevance to tourism demand. Volatility models are able to quantify the impacts of positive and negative shocks on tourism demand. The impacts of negative shocks vary in magnitude and duration according to the destination involved and the nature of the shock. The forecasting capability of these models has never been assessed in the tourism field. They are shown to generate highly accurate forecasts, but become optimal when combined with forecasts obtained from exponential smoothing models. Two methods of combining individual forecasts are considered. Bias in individual volatility and smoothing models and in combinations of them is examined.