Measuring Geopolitical Risk

TLDR

The GPR index captures the impact of both the threat and occurrence of adverse geopolitical events. The study introduces a news‑based measure of adverse geopolitical events and their associated risks. The authors construct a news‑based index and augment it with industry‑ and firm‑level risk indicators. The index spikes during major geopolitical crises, and higher risk predicts lower investment and employment, higher disaster probability, and greater downside risk, with industry‑ and firm‑level exposure amplifying investment declines.

Abstract

<ns2:p>We present a news-based measure of adverse geopolitical events and associated risks. The geopolitical risk (GPR) index spikes around the two world wars, at the beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks. The adverse consequences of the GPR index are driven by both the threat and the realization of adverse geopolitical events. We complement our aggregate measures with industry- and firm-level indicators of geopolitical risk. Investment drops more in industries that are exposed to aggregate geopolitical risk. Higher firm-level geopolitical risk is associated with lower firm-level investment.</ns2:p>