Measuring Geopolitical Risk

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