Asymmetric responses of air travel demand to geopolitical risk: Evidence from Korea

Abstract

Korea is recognized for its exposure to substantial and unpredictable swings in geopolitical conditions. This paper investigates the relationship between geopolitical risk and inbound air travel demand in Korea over the past decades. Our analysis documents significant and asymmetric responses of air travel demand to geopolitical risk. Increases in geopolitical risk are followed by a delayed decline in air travel demand, with the negative response materializing after approximately two quarters rather than immediately. This implies that travelers are inclined to be more cautious or conservative, possibly adjusting their travel decisions more significantly in response to perceived threats or uncertainties. In contrast, decreases in geopolitical risk are associated with a gradual positive adjustment in air travel demand. Overall, our findings suggest that while individuals demonstrate risk-averse tendencies in the face of heightened geopolitical risk, they subsequently adapt their travel plans, reflecting gradual adjustment in travel behavior following periods of heightened geopolitical uncertainty.