Measuring Geopolitical Risk

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.

Automated summary

This paper presents a news-based measure of adverse geopolitical events and their risks. The geopolitical risk index is particularly high during significant historical events such as world wars, the Korean War, the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk leads to lower investment and employment, as well as increased probability of disasters and larger downside risks. This risk is driven by both the threat and occurrence of adverse geopolitical events. Industry- and firm-level indicators also show that investment declines more in industries exposed to geopolitical risk, and higher firm-level geopolitical risk is associated with lower investment.