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Measuring Geopolitical Risk

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Abstract

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.

Suggested Citation

  • Dario Caldara & Matteo Iacoviello, 2018. "Measuring Geopolitical Risk," International Finance Discussion Papers 1222r1, Board of Governors of the Federal Reserve System (U.S.), revised 23 Mar 2022.
  • Handle: RePEc:fip:fedgif:1222
    DOI: 10.17016/IFDP.2018.1222r1
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    More about this item

    Keywords

    Geopolitical Risk; War; Terrorism; Business Cycles; Disaster Risk; Firm-level investment; Textual Analysis; Earnings Calls; Quantile Regressions;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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