Cyclical Dynamics of Tourism-Linked Exchange-Traded Funds: A Time-Varying Intra-Market Perspective

Imagine the financial world as a giant, chaotic ocean where money flows like water. In this ocean, there are special boats called Exchange-Traded Funds (ETFs). Think of an ETF not as a single boat, but as a massive raft carrying dozens of smaller boats from the same neighborhood. If you buy a "tourism raft," you aren't just buying one airline ticket or one hotel room; you are buying a slice of the entire vacation industry, from airlines and cruise ships to theme parks and travel apps.

Now, imagine a storm hits the ocean. In the world of finance, these storms are called "volatility." When the weather is calm, all the boats on the raft might drift gently together. But when a hurricane strikes, things get messy. Some boats might start rocking violently, and the question becomes: does the shaking of one boat make the others shake too? This is what experts call "volatility spillover." It's like a game of dominoes; if one piece falls, does it knock over the whole line? Understanding this is crucial because if you are trying to build a safe portfolio (a collection of investments), you want to know if your "tourism raft" will sink alone or if it will drag your other boats down with it when the storm gets bad. This paper dives deep into that exact question, looking at how tourism rafts behave when the financial ocean gets rough.

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The Great Tourism Raft Shake-Up

This study takes a close look at four specific "tourism rafts" (ETFs) that track companies in airlines, hotels, travel tech, and leisure. The researchers watched these rafts from March 11, 2020, all the way through November 14, 2025. That's a long time to watch, covering the massive storm of the COVID-19 pandemic, the Russia-Ukraine war, and some wild swings in interest rates and crypto markets. The goal was to see how these rafts reacted to the waves and, more importantly, how they shook each other up.

The Stormy Ride: Risk and Reward
First, the researchers checked the "safety report" for these rafts. They used a few different tools to measure how much risk an investor was taking for the reward they got. The results were a bit gloomy. When they looked at the standard safety scores (called Sharpe, Sortino, and Treynor ratios), the numbers were negative. In plain English, this means that for the amount of danger these tourism rafts were in, the passengers (investors) didn't get enough extra reward to make it worth the ride. It was a bumpy, dangerous trip with a low payoff.

However, there was a tiny silver lining. One specific score, called Jensen's Alpha, was positive. This suggests that even though the ride was rough, the rafts did manage to do slightly better than the general market would have predicted on their own. But the researchers warn that this small win isn't enough to cancel out the huge risks involved.

The "What If" Scenarios: Worst-Case Warnings
Next, the team asked, "What is the worst that could happen?" They used two tools, VaR and CVaR, to predict the size of potential losses. Think of VaR as a warning sign that says, "99% of the time, you won't lose more than X amount." CVaR goes a step further, asking, "Okay, but if you do cross that line and get into the worst 1% of disasters, how bad will it actually get?"

The answer was scary. For the airline-focused raft (JETS), the worst-case scenario suggested a potential loss of up to 6.6% in a single day, and if things really went south (the worst 1% of days), the loss could jump to 9.8%. This tells us that tourism investments are very sensitive to bad news. When the storm hits, these rafts don't just wobble; they can take massive hits.

The Rhythm of the Waves: Short vs. Long
The researchers then used a special "wave detector" (Wavelet Coherence) to see if the rafts were moving in sync. They found that during the pandemic and the following years, the rafts were definitely dancing to the same beat. When one went up or down, the others tended to follow, especially in the medium and long term.

It's like a group of friends holding hands in a circle. If the wind blows hard on one person, the whole circle gets pulled. The study found that this connection got stronger during times of stress. Even when the market was trying to recover, the rafts were still tightly linked, meaning you couldn't easily hide from the storm by just switching between different tourism rafts. They were all in the same boat, so to speak.

The Domino Effect: Who Pushes Whom?
Finally, the team looked at the "spillover" effect—who was pushing whom? They used a complex math model (QVAR) to see how shocks traveled between the rafts during different market moods: bear markets (when prices are falling), normal markets, and bull markets (when prices are rising).

Here is the surprising part: the shaking gets worse in both the worst and the best times.

• In Bear Markets (The Storm): The "Leisure and Entertainment" raft (PEJ) acted like a pusher, sending shocks to the others. The "Travel Tech" raft (AWAY) was mostly a receiver, getting hit by the waves.
• In Bull Markets (The Party): Even when things were going well, the shaking didn't stop. In fact, the total connection between the rafts got even stronger (jumping to 72.40% in the bull market compared to 65.31% in normal times). This suggests that when investors get excited and start buying, they also start moving together in a way that spreads risk quickly.

The study found that the "Travel Tech" raft (AWAY) and the "Airline" raft (JETS) were often the ones getting hit the hardest, acting as the "receivers" of bad news. Meanwhile, the "Leisure" raft (PEJ) often acted as the "transmitter," spreading the news (good or bad) to the others.

The Big Takeaway
So, what does this all mean for a curious investor? The paper suggests that tourism-linked ETFs are like a tightly woven net. When one part of the net gets pulled, the whole thing moves. They are very sensitive to big global events like pandemics or wars. While they might offer a little extra return in good times, the risk of losing money during bad times is high, and the "safety" of diversifying within the tourism sector is limited because everything tends to move together.

The researchers conclude that extreme losses are much more likely to happen than a standard math model would predict. If you are investing in these rafts, you need to be prepared for the possibility that when the storm hits, the whole raft might shake violently, and the waves might be bigger than you expected. It's a reminder that in the world of tourism investments, you can't always count on the boats to stay steady, and sometimes, the whole ocean moves at once.