Measuring Geopolitical Risk

81 Pages Posted: 7 Feb 2018 Last revised: 29 Apr 2020

See all articles by Dario Caldara

Dario Caldara

Board of Governors of the Federal Reserve System

Matteo Iacoviello

Board of Governors of the Federal Reserve System

Date Written: February, 2018

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.

Keywords: Geopolitical Risk, War, Terrorism, Business Cycles, Disaster Risk, Firm-level investment, Textual Analysis, Earnings Calls, Quantile Regressions

JEL Classification: C1, D80, E32, H56

Suggested Citation

Caldara, Dario and Iacoviello, Matteo, Measuring Geopolitical Risk (February, 2018). International Finance Discussion Paper No. 1222R1, Available at SSRN: https://ssrn.com/abstract=3117773 or http://dx.doi.org/10.17016/IFDP.2018.1222r1

Dario Caldara (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matteo Iacoviello

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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