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Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Measuring Geopolitical Risk
Dario Caldara Matteo Iacoviello
Federal Reserve Board
DIW BerlinNovember 3, 2017
Disclaimer: The views expressed are solely the responsibility of the authors and should not be interpreted as reflecting the
views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Risks Receive a Lot of Attention
Geopolitical Risks are often cited by policy-makers, investors, and media askey determinants of economic decisions.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
But their Impact is Unclear
Little research devoted to quantify geopolitical risks.
Little research devoted to measure macroeconomic and financialimpact of geopolitical risks.
Many empires of the past, from the Roman empire to China’s Qingdinasty, were brought down by a combination of adverse geopoliticalevents.
The economies of many countries (Syria, Libya, Yemen, Venezuela)have collapsed in recent years following wars and political unrest.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Relationship to the Literature on Uncertainty
Recent research effort devoted to understand effects ofmacroeconomic uncertainty.
Most proxies for uncertainty are based/related to economic andfinancial indicators (EPU, VIX, IVOL, RVOL, JLN, ...)
I Endogeneity of these proxies.
Events captured by our index are more exogenous to themacroeconomy than those captured by other uncertainty proxies.
Periods of high uncertainty often result of shocks to first and higherorder moments.
I We distinguish between geopolitical acts and threats.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Our Questions
1. How can we measure geopolitical risk?
Available indices not very amenable to empirical analysis:I Capture very different events;
I Constructed judgmentally;
I Little variation or short sample availability; Examples
I Constructed as combinations of outcome variables(gold, VIX, dollar, oil prices).
2. What are the real and financial effects of geopolitical risk?
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Definition of Geopolitical Risk
Geopolitical risk is not a well-defined concept.
We define geopolitical risk as the risk associated with wars, tensionsbetween states, and terrorist acts that affect the normal course ofinternational relations.
Definition follows most common (and journalistic) usage, but leavesroom for some judgement.
It helps excluding some geopolitical phenomena:
I Major economic crisis (e.g. Eurozone debt crisis)
I Major democratic political events (e.g. Brexit)
I Climate change, civil right movements, domestic terrorist acts...
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Methodology
Our methodology follows Baker, Bloom, Davis (2016).
We construct the geopolitical risk (GPR) index counting in 11international newspapers the share of articles mentioning phrasesrelated to geopolitical tensions.
Benchmark index (from 1985):
I U.S.: Boston Globe; Chicago Tribune; LA Times; NYT; WSJ; WaPo.
I United Kingdom: Daily Telegraph; FT; Guardian; Times.
I Canada: The Globe and Mail.
Historical index (from 1899): NYT, Chicago Tribune, and FT
GPR as covered by the English-speaking press.
More weight to events with U.S. involvement.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
MeasurementNot as Simple as Searching for ’Geopolitical’ AND ’Risks’
Language has changed:I Term ”Geopolitical risk” popular after 9/11I ”War risks” used to be ”War perils”I ”Terror Threats” used to be ”Terrorist Menaces”
News articles content has changed:I Focus shifted from ’chronicles’ to ’opinions’.
Nature of risks has changed:I From wars to nuclear threats to terrorism.
We choose search categories through an auditing process andrefinements using machine-learning algorithms.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
MeasurementBuilding the Search Terms
We define 6 search categories based on pilot (stage 1) auditing ofarticles likely mentioning geopolitical risks.
Audit GP set containing Geopolitics or War or Military orTerrorism/t – most RECURRING WORDS in geopolitics books.
In 2,500 articles in GP set, 35% discuss high geopolitical risk(GP = 1).
Most articles in GP = 1 contain additional words related to risks orthreats, tensions between states, beginning of wars.
Construct search categories based on CONTENT OF ARTICLES in GP = 1.
Exclude from searches phrases overwhelmingly associated with falsepositives (GP = 0) (e.g. movie, museum, anniversary, memorial,obituary, ”end of the war”).
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Search TermsSearch Category Words
1. GeopoliticalThreats
Geopolitical AND (risk* OR concern* OR tension* OR uncertaint*)
”United States” AND tensions AND (military OR war OR geopolitical OR coupOR guerrilla OR warfare) AND (”Latin America” OR ”Central America” OR”South America” OR Europe OR Africa OR ”Middle East” OR ”Far East” ORAsia)
2. NuclearThreats
(”nuclear war” OR ”atomic war” OR ”nuclear conflict” OR ”atomic conflict” OR”nuclear missile*”) AND (fear* OR threat* OR risk* OR peril* OR menace*)
3. War Threats”war risk*” OR ”risk* of war” OR ”fear of war” OR ”war fear*” OR ”militarythreat*” OR ”war threat*” OR ”threat of war”
(”military action” OR ”military operation” OR ”military force”) AND (risk* ORthreat*)
4. TerroristThreats
”terrorist threat” OR ”terrorist threats” OR ”menace of terrorism” OR ”terrorismmenace” OR ”threat of terrorism” OR ”terrorist risk” OR ”terror risk” OR ”riskof terrorism” OR ”terror threat” OR ”terror threats”
5. War Acts (beginning OR outbreak OR onset OR escalation OR start) ”of the war”
(war OR military) AND (”air strike” OR ”heavy casualties”)
6. Terrorist Acts ”terrorist act” OR ”terrorist acts”
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Search WordsSearch Category Words
1. GeopoliticalThreats
Geopolitical AND (risk* OR concern* OR tension* OR uncertaint*)
”United States” AND tensions AND (military OR war OR geopolitical OR coupOR guerrilla OR warfare) AND (”Latin America” OR ”Central America” OR”South America” OR Europe OR Africa OR ”Middle East” OR ”Far East” ORAsia)
2. NuclearThreats
(”nuclear war” OR ”atomic war” OR ”nuclear conflict” OR ”atomic conflict” OR”nuclear missile*”) AND (fear* OR threat* OR risk* OR peril* OR menace*)
3. War Threats”war risk*” OR ”risk* of war” OR ”fear of war” OR ”war fear*” OR ”militarythreat*” OR ”war threat*” OR ”threat of war”
(”military action” OR ”military operation” OR ”military force”) AND (risk* ORthreat*)
4. TerroristThreats
”terrorist threat” OR ”terrorist threats” OR ”menace of terrorism” OR ”terrorismmenace” OR ”threat of terrorism” OR ”terrorist risk” OR ”terror risk” OR ”riskof terrorism” OR ”terror threat” OR ”terror threats”
5. War Acts (beginning OR outbreak OR onset OR escalation OR start) ”of the war”
(war OR military) AND (”air strike” OR ”heavy casualties”)
6. Terrorist Acts ”terrorist act” OR ”terrorist acts”
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Search WordsSearch Category Words
1. GeopoliticalThreats
Geopolitical AND (risk* OR concern* OR tension* OR uncertaint*)
”United States” AND tensions AND (military OR war OR geopolitical OR coupOR guerrilla OR warfare) AND (”Latin America” OR ”Central America” OR”South America” OR Europe OR Africa OR ”Middle East” OR ”Far East” ORAsia)
2. NuclearThreats
(”nuclear war” OR ”atomic war” OR ”nuclear conflict” OR ”atomic conflict” OR”nuclear missile*”) AND (fear* OR threat* OR risk* OR peril* OR menace*)
3. War Threats”war risk*” OR ”risk* of war” OR ”fear of war” OR ”war fear*” OR ”militarythreat*” OR ”war threat*” OR ”threat of war”
(”military action” OR ”military operation” OR ”military force”) AND (risk* ORthreat*)
4. TerroristThreats
”terrorist threat” OR ”terrorist threats” OR ”menace of terrorism” OR ”terrorismmenace” OR ”threat of terrorism” OR ”terrorist risk” OR ”terror risk” OR ”riskof terrorism” OR ”terror threat” OR ”terror threats”
5. War Acts (beginning OR outbreak OR onset OR escalation OR start) ”of the war”
(war OR military) AND (”air strike” OR ”heavy casualties”)
6. Terrorist Acts ”terrorist act” OR ”terrorist acts”
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Search WordsSearch Category Words
1. GeopoliticalThreats
Geopolitical AND (risk* OR concern* OR tension* OR uncertaint*)
”United States” AND tensions AND (military OR war OR geopolitical OR coupOR guerrilla OR warfare) AND (”Latin America” OR ”Central America” OR”South America” OR Europe OR Africa OR ”Middle East” OR ”Far East” ORAsia)
2. NuclearThreats
(”nuclear war” OR ”atomic war” OR ”nuclear conflict” OR ”atomic conflict” OR”nuclear missile*”) AND (fear* OR threat* OR risk* OR peril* OR menace*)
3. War Threats”war risk*” OR ”risk* of war” OR ”fear of war” OR ”war fear*” OR ”militarythreat*” OR ”war threat*” OR ”threat of war”
(”military action” OR ”military operation” OR ”military force”) AND (risk* ORthreat*)
4. TerroristThreats
”terrorist threat” OR ”terrorist threats” OR ”menace of terrorism” OR ”terrorismmenace” OR ”threat of terrorism” OR ”terrorist risk” OR ”terror risk” OR ”riskof terrorism” OR ”terror threat” OR ”terror threats”
5. War Acts (beginning OR outbreak OR onset OR escalation OR start) ”of the war”
(war OR military) AND (”air strike” OR ”heavy casualties”)
6. Terrorist Acts ”terrorist act” OR ”terrorist acts”
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Benchmark Geopolitical Risk Index
0
100
200
300
400
500
600
1985 1990 1995 2000 2005 2010 2015
GPR Benchmark Index (GPR)Index (2000-2009 = 100)
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Benchmark Geopolitical Risk Index
0
100
200
300
400
500
600
1985 1990 1995 2000 2005 2010 2015
GPR Benchmark Index (GPR)Index (2000-2009 = 100)
TWA Hijacking
US bombs Libya
US Invasion of Panama
Kuwait Invasion
Gulf War
Iraq Disarmament Crisis 1998
9/11
Iraq invasion
Madrid bombings
London bombings
Iran/Nuclear Tensions
Arab Spring: Syrian & Lybian
War
Syrian Civil War Escalation
Russia annexes Crimea
ISIS Escalation
Paris attacks
https://www2.bc.edu/matteo-iacoviello/gpr.htm
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Threats vs. Geopolitical Acts
GPR index captures a convolution of shocks to first and higher ordermoments of the distribution of geopolitical events.
I Spikes in risk often coincide with realization of big events.
We organize searches to separate threats that do not immediatelymaterialize from acts that reveal an underlying threat.
I Geopolitical Threats (GPT): Search categories 1 to 4;
I Geopolitical Acts (GPA): Search categories 5 to 6.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Threats vs Geopolitical ActsCorrelation coefficient: 0.55
0
100
200
300
400
500
600
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
GPR THREATS AND ACTSIndex (2000-2009 = 100)
GPR Threats GPR Acts
TWA Hijacking
US bombs Libya
US Invasion of Panama
Kuwait Invasion
Gulf War
Iraq Disarmament Crisis 1998
9/11
Iraq invasion
Madrid bombings
London bombings
Iran/Nuclear Tensions
Arab Spring: Syrian & Lybian
War
Syrian Civil War Escalation
Russia annexes Crimea
ISIS Escalation
Paris attacks
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Threats vs Acts in 1991 and 2003
0
100
200
300
400
1990 1991
Gulf War
GPR Threats GPR Acts
0
100
200
300
400
500
600
2002 2003
Iraq Invasion
GPR Threats GPR Acts
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Auditing: Reading and Manually Coding Articles
Stage 1: Audit pilot sample of 2,500 articles from set GP likelycontaining all articles mentioning geopolitical risk
I Use this audit to refine search terms entering construction of GPR
Stage 2: Audit sample of 2,500 articles from set GPR setI 87% mention high or rising geopolitical tensions.I 4% mention low or decreasing geopolitical tensions.I Correlation between GPR and audited-GPR is 0.98
Stage 3: Audit 6,125 articles ( 50 per quarter) from GP set toconstruct human GPR index
I Code articles as 0/1 according to a 20-page Audit GuideI Correlation between computer-generated GPR index and Human Index
is 84 percent (at quarterly frequency) HUMANINDEX
Audit is a long, tedious and painful process PROCESS .
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Comparison with Human Index
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
500
600
GPR IndexHuman Index
Quarterly Correlation: 0.84 Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Additional Checks
GPR BROAD: Include words often associated with true positives(e.g. ”military presence” OR ”international terror*”)
GPR NARROW: Exclude words often associated with false positives(e.g. ”death penalty” OR ”supreme court”)
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
GPR Robust to Adding/Removing Words
0
500
1000
1500
2000
2500
3000
3500
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
GPR Broad RawTotal Articles
GPR Broad
GPR Benchmark
TWA Hijacking
US bombs Libya
US Invasion of Panama
Kuwait Invasion
Gulf War
Iraq Disarmament Crisis 1998
9/11
Iraq invasion
Madrid bombings
London bombings
Iran/Nuclear Tensions
Arab Spring: Syrian & Lybian
War
Syrian Civil War Escalation
Russia annexes Crimea
ISIS Escalation
Paris attacks
0
500
1000
1500
2000
2500
3000
3500
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
GPR Narrow RawTotal Articles
GPR Narrow
GPR Benchmark
TWA Hijacking
US bombs Libya
US Invasion of Panama
Kuwait Invasion
Gulf War
Iraq Disarmament Crisis 1998
9/11
Iraq invasion
Madrid bombings
London bombings
Iran/Nuclear Tensions
Arab Spring: Syrian & Lybian
War
Syrian Civil War Escalation
Russia annexes Crimea
ISIS Escalation
Paris attacks
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Geopolitical Risk Index
0
100
200
300
400
500
600
700
800
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
GPR Historical
Sec
ond
Boe
r W
ar a
nd B
oxer
Reb
ellio
n
Beg
inni
ng o
f Rus
sian
-Jap
anes
e W
ar
Firs
t Bal
kan
War
Beg
ins
WW
1 B
egin
sU
S J
oins
WW
1
Italia
n In
vasi
on o
f Eth
iopi
aH
itler
thre
aten
s C
zech
oslo
vaki
aB
egin
ning
of W
WII
Atta
ck o
n P
earl
Har
bor
Ope
ratio
n G
reen
hous
e
Sec
ond
Tai
wan
Str
ait C
risis
Sov
iet U
nion
Res
umes
Nuc
lear
Tes
ts
Mid
dle
Eas
t Ten
sion
s pr
e-6
Day
War
Vie
tnam
War
: Firs
t Bat
tle o
f Qua
ng T
riY
om K
ippu
r W
ar
Fau
klan
ds W
ar B
egin
sA
ble
Arc
her
83U
S B
ombi
ng o
f Lib
ya
Gul
f War
9/11
Iraq
Inva
sion
Rus
sia
anne
xes
Crim
ea
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Index: War Threats
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
GPRWar Threats
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Index: War Acts
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
GPRWar Acts
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Index: Nuclear Threats
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
GPRNuclear Threats
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Index: Terror Threats
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
GPRTerrorist Threats
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
The Historical Index: Terror Acts
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
GPRTerrorist Acts
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Comparison with Human Index (Historical)
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700
Historical GPR IndexHuman Index
Quarterly Correlation: 0.80
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Additional Checks
1. Could you do this with a simple index? No Check1
2. Could you use other available indicators? No Check2
3. Do Economic News affect GPR? No Check3
4. Do Other News affect GPR? No Check4
5. How does it relate to VIX? Check5
6. How does it relate to EPU? Check6
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
1. Comparison, Naive Index
1900 1920 1940 1960 1980 20000
100
200
300
400
500
600
700Historical GPR Index, Comparison (Index: 2000-2009=100)
Historical Index Hist, 4 Words
Naive index uses only: ”war” OR ”terrorism/t” OR ”military” OR”geopolitics” Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
2. Comparison, International Crisis Database
1900 1920 1940 1960 1980 20000
100
200
300
400
500
His
toric
al In
dex
(200
0-20
09=
100)
0
2
4
6
8
10
Cris
is C
ount
GPRHICB: Number of International Crisis
Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
3. Comparison: GPR No Econ Words
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
500
600GPR NOECON
GPRGPR Excluding Econ Related Terms
Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
4. Comparison: GPR and Natural Disasters
1985 1990 1995 2000 2005 2010 20150
200
400
600
800
1000
Hur
rican
e K
atrin
a
Lom
a P
rieta
Ear
thqu
ake
Nor
thrid
ge E
arth
quak
e
Indi
an O
cean
Ear
thqu
ake
GPRNatural Disasters Index
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
500
600
GPRGPR Explained by Natural Disasters
Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
5. Comparison with the VIX
Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
6. Comparison: Economic Policy Uncertainty
0
100
200
300
400
500
600
1985 1990 1995 2000 2005 2010 201550
100
150
200
250
GPR vs EPUGPREPU
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
6. Comparison: Economic Policy Uncertainty
GPR vs EPU EPU GPR
1985 1990 1995 2000 2005 2010 2015
0
100
200
300
400
500
600
50
100
150
200
250 US bombs Libya
Kuwait Invasion Madrid
bombings
London bombings
Transatlantic aircraft plot
Russia annexes Crimea
Ukraine and ISIS Paris
attacks
Black Monday
Gulf War
Clinton Election Russian Crisis/LTCM
Bush Election 9/11
Iraq invasion
Stimulus Debate
Lehman Failure and TARP
Euro Crisis Debt Ceiling Debate Fiscal Cliff
Govt. Shutdown
Back
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Economic Effects of GPR
How could GPR matter?
1. Standard Uncertainty/Macro Channels. Test this using macro VAR.
2. Effects on Capital Flows. Uncertainty could reshuffle portfolios towardssafe havens.
3. Effects on Stock Returns.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Effects of Higher GPR: A VAR Analysis
Sample: 1985M1 to 2016M12.
US VAR:1. GPR Index;2. Economic Policy Uncertainty;3. 2-Year Treasury Yield;4. US industrial production;5. Oil price;6. S&P 500 Index;7. Industries Excess Return Over S&P 500.
International VARs:1. GPR Index;2. Country/Region ’X’ industrial production;
Identification: GPR Index ordered 1st in Cholesky ordering.
Shock sized to match rise in GPR after major events
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to a GPR ShockEffects on US Economy
0 6 12 18 24
0
50
100
150
GPR Index
0 6 12 18 24-10
0
10
20
30EPU Index
0 6 12 18 24
-5
0
5
10
(%)
Consumer Sentiment
0 6 12 18 24-2
-1.5
-1
-0.5
0
0.5
(%)
Industrial Production
0 6 12 18 24-1
-0.8
-0.6
-0.4
-0.2
0
0.2
(%)
Employment
0 6 12 18 24
-4
-2
0
2
(%)
Gross Trade
0 6 12 18 24-5
0
5
(%)
S&P500
0 6 12 18 24-20
-15
-10
-5
0
5
(%)
Real Oil Price
0 6 12 18 24-40
-20
0
20
40
(BP
S)
2-Year Treas. Yield
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to a GPR ShockExcess Return Over S&P 500 - Selected Industries
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Defense
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Oil
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Aircraft
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Steel Works
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Mining
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Insurance
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to a GPR ShockInternational Real Effects
0 6 12 18 24
-2
-1
0
1
2
(%)
World
0 6 12 18 24
-2
-1
0
1
2
(%)
Advanced Economies
0 6 12 18 24
-2
-1
0
1
2
(%)
Emerging Economies
0 6 12 18 24
-2
-1
0
1
2
(%)
Canada
0 6 12 18 24
-2
-1
0
1
2
(%)
United Kingdom
0 6 12 18 24
-2
-1
0
1
2
(%)
Mexico
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Effects of Higher GPR: Threats vs Acts
Same VAR as before, replace GPR with GPA and GPT.
Identification: GPA ordered 1st and GPT 2nd in Cholesky ordering.
I GPT shocks do not move GPA on impact.
I GPA shocks move GPT on impact.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to GPA and GPT ShocksEffects on US Uncertainty
0 6 12 18 24
0
50
100
150
200
250
300GPA (Acts) Index
0 6 12 18 24
0
50
100
150
200
250
300GPA (Acts) Index
0 6 12 18 24-50
0
50
100
150
GPT (Threats) Index
0 6 12 18 24-50
0
50
100
150
GPT (Threats) Index
0 6 12 18 24-30
-20
-10
0
10
20
30EPU Index
0 6 12 18 24-30
-20
-10
0
10
20
30EPU Index
GPA Shock
GPT Shock
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to GPA and GPT ShocksEffects on US Economy
0 6 12 18 24-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
(%)
Industrial Production
0 6 12 18 24-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
(%)
Industrial Production
0 6 12 18 24-5
0
5
(%)
Gross Trade
0 6 12 18 24-5
0
5
(%)
Gross Trade
0 6 12 18 24
-4
-2
0
2
4
6
(%)
S&P500
0 6 12 18 24
-4
-2
0
2
4
6
(%)
S&P500
GPA Shock
GPT Shock
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to GPA and GPT ShocksExcess Return Over S&P 500 - Selected Industries (1)
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Defense
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Defense
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Oil
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Oil
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Aircraft
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Aircraft
GPA Shock
GPT Shock
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Impulse Responses to GPA and GPT ShocksExcess Return Over S&P 500 - Selected Industries (2)
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Steel Works
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Steel Works
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Mining
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Mining
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Insurance
0 6 12 18 24
-10
-5
0
5
10
15
(%)
Insurance
GPA Shock
GPT Shock
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Risk and Capital Flows
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Geopolitical Risk and Stock Returns
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Conclusions
We construct a quantitative measure of geopolitical risk
We measure the economic effects of changes in geopolitical risk
GPR index is perhaps more ”exogenous” to economic conditions thanother popular measures of risk and uncertainty.
We are currently working on constructing country-specific GPRindexes.
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Available Indices 1: Doomsday Clock
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Available Indices 2: Geopolitical Heat Maps
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Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Frequent Unigrams in Flint’s Geopolitics Textbook
geop
olit
stat
e
wor
ld
war
natio
n
terr
or
polit
coun
tri
glob
al
conf
lict
pow
er
boun
dari
code
lead
er
unit0
200
400
600
800
1000
1200
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Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Content of Articles in Pilot Auditing
Scatter plot of the 4 principal components from analysis of the top 50bigrams from 2,500 newspaper abstracts classified as E1.
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Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
What Does GPR Capture?
1985 1990 1995 2000 2005 2010 20150
200
400
600
800
1000
Hur
rican
e K
atrin
a
Lom
a P
rieta
Ear
thqu
ake
Nor
thrid
ge E
arth
quak
e
Indi
an O
cean
Ear
thqu
ake
GPRNatural Disasters Index
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
500
600
GPRGPR Explained by Natural Disasters
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
GPR Argentina
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
500
600GPR-ARGENTINA
Cam
po d
e M
ayo
Reb
ellio
n
"9/1
1"
Flu
Pan
dem
ic /
Cop
aF
aukl
and
Ten
sion
sArgentina AND (tensions/risk*/fear/chaos/uncertainty/unrest/violence...)AND (military/war/geopolitical/coup/guerrilla/warfare/army/terrorism)
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
GPR Brazil
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
GPR-BRAZIL
"9/1
1" Bra
zil e
lect
s le
ftist
Cur
renc
y W
ar
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
GPR China
1985 1990 1995 2000 2005 2010 20150
100
200
300
400
GPR-CHINAT
iana
nmen
Sq.
Pro
test
sLi
Pen
g V
isits
Mos
cow
Mis
sile
Tes
ting
AF
C
Hai
nan
Isla
nd In
cide
nt"9
/11"
Introduction Construction GPR Audit GPRH Comparison Effects Conclusions Appendix GPRC
Human Auditors
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