Measuring Geopolitical Risk · GPR exogenous to U.S. macroeconomic conditions. Higher GPR reduces investment, employment, and stock returns. E ects mostly driven bythreatof adverse

1. Introduction 2. Construction 3. Aggregate Effects 4. Firm-Level Effects 5. Conclusions Appendix

Measuring Geopolitical Risk

Dario Caldara Matteo Iacoviello

Federal Reserve Board

November 20, 2019 - University of Maryland

Disclaimer: The views expressed are solely the responsibility of the authors and should not be interpreted as reflecting theviews of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System.


Geopolitical Risks Receive a Lot of Attention

Geopolitical risks are often cited by policy-makers, investors, and media askey determinants of economic decisions.

75% of investors worry about geopolitical risk (Gallup Survey 2017).

Geopolitical risk salient risk to outlook for BoE, ECB, IMF, WB.

Higher geopolitical risks can:

1. Heighten perception of disastrous outcomes (destruction of humanand physical capital, disruption of supply chains, expropriation risk)

2. Make investment in risky projects less attractive.

3. Lower consumer confidence


But Should They?

To many, concerns about adverse geopolitical events seem overstated asmany events should have little direct economic impact for the UnitedStates (e.g. 9/11; Russia-Ukraine tensions; US-North Korea tensions).

Do geopolitical risks have economic consequences for the United States?

Answering this question requires definition & measurement of geopoliticalrisk, and empirical analysis


What We Do: Definition and Measurement

1. Construct an indicator of geopolitical risk—GPR Index—measuringfrequency of articles in leading newspapers discussing risinggeopolitical tensions.I Focus on risks associated with wars, terrorism, tensions between states;

2. Separate threats of adverse geopolitical events from their realization.

GPR highly correlated with firms’ own assessment of geopolitical risks.

GPR index available at daily & monthly frequencies.

GPR index better than many existing indicators that are not amenable toempirical analysis. Examples


What We Do: Empirical Evidence on GPR

Aggregate analysis:

GPR exogenous to U.S. macroeconomic conditions.

Higher GPR reduces investment, employment, and stock returns.

Effects mostly driven by threat of adverse geopolitical events ratherthan their realization.

Firm-level analysis:

Reduction in firm-level investment stronger for firms highly exposed toaggregate GPR.

Idiosyncratic GPR reduces firm-level investment


Plan of the Talk

1. Introduction

2. Construction of the GPR Index:I Definition.

I Measurement.

I Audit.

3. Aggregate analysis:I Exogeneity

I Predictive regressions on US investment.

I VAR models.

4. Firm-level analysis on US investment.

5. Conclusions.


Definition: Geopolitics and Geopolitical Risk

We define Geopolitical Risk as the “risk associated with wars, terroristacts, and tensions between states that affect the normal and peacefulcourse of international relations.”

Geopolitical risk captures both risk that these events materialize andnew risks associated with escalation of existing events.


Measurement: Newspaper Searches

The geopolitical risk (GPR) index is the frequency of articles in 11newspapers mentioning high or rising geopolitical tensions.

GPR ∝GU

where G: articles mentioning geopolitical tensions;U : total number of articles

Benchmark index (from 1985): Boston Globe; Chicago Tribune; LosAngeles Times; NYT; WSJ; WaPo; Daily Telegraph; FT; Guardian;Times; The Globe and Mail.

Historical index (from 1899): NYT, Chicago Tribune, and WaPo

Risks as covered/perceived by the English-speaking press.


Measurement: Selecting Terms in set G

Start with a pilot audit of articles likely mentioning geopolitical risks,by reading and coding E0 or E1 a set of articles E containingGeopolitics or War or Military or Terrorism/t—the most RECURRING WORDS in geopolitics books.

Most articles in E1 contain additional words related to risks or threats,tensions between states, beginning of wars.

Based on the content in E1, we construct the terms in set G.

Notes:I We exclude from searches phrases overwhelmingly associated with false

positives (E0) (e.g. movies, anniversaries, obituaries, end of the war)

I We try to account for the evolution of language and content over time.


Measurement: 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”


The Benchmark Geopolitical Risk Index

0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

North Korea

GPR Index updated monthly and available athttps://www2.bc.edu/matteo-iacoviello/gpr.htm

https://www2.bc.edu/matteo-iacoviello/gpr.htm


Audit: Reading and Manually Coding Articles

Full Scale Audit: Sample 6,125 articles from E , code them as 0/1.

Goal: comparison of GPR index with “human GPR”:

GPR =GU

human GPR =E1

EEU

Correlation between GPR and “Human GPR”: 84%.

Ex post Audit: Sample 2,500 articles from set G:I 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

Comparison GPR VS. SPORTS Newspapers slant


GPR and EPU

0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 201750

100

150

200

250

GPR vs EPUEPU GPR

US bombs Libya

Kuwait Invasion Madrid

bombings

London bombings

Transatlanticaircraft plot


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 CliffGovt. Shutdown

0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 20170

10

20

30

40

50

60

70

80

90

GPR vs VIXVIX GPR

BlackMonday

KuwaitInvasion

AsianFinancial

Crisis LTCM

9/11

2002correction

Iraqinvasion

Lehman Euro crisis

GPR Index shows little correlation with EPU Index, except around 9/11and the Iraq War.

GPR VS. VIX


GPR and ICRG U.S. Conflict Index

1985 1990 1995 2000 2005 2010 20150

100

200

300

400

500

600

GP

R In

dex

4

6

8

10

12

US

Ext

erna

l Con

flict

Rat

ing

(Inv

erte

d S

cale

)

GPRICRG U.S. External Conflict Rating (Inverted Scale)

GPR Index displays more high-frequency variation relative to other proxies of war

risk, allowing to establish the importance of GPR for stock returns over relatively

short samples.


GPR and GPR from Firms’ Earnings Calls

1985 1990 1995 2000 2005 2010 20150

100

200

300

400

500

GPRGPR from Earnings Calls

GPR Index highly correlated with firms’ own assessment of geopolitical risk,

constructed using same search terms in transcripts of listed firms’ quarterly

earnings calls with analysts.


The Daily GPR Index1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

0 200 400 600 800 1000 1200

A1985/06/17: TWA Hijacking

A1986/04/16: U.S. Bombing of Libya

A1987/04/17U.S-Russia negotiations over nuclear weaponsA1987/10/20: War Threats in Persian Gulf

A1989/12/21: U.S. Invades PanamaA1990/08/04: Iraq Invades Kuwait

A1991/01/15 : Gulf War. Operation Desert Storm

A1993/01/14 : Air Strikes against IraqA1993/06/28: U.S. Raid on Baghdad

A1996/09/04 : U.S. Raid on Iraq

A1998/02/18: Clinton Makes Case for Strike Against IraqA1998/12/17: Iraq Disarmament Crisis Escalation

A1999/12/25 : Holidays' Terrorist Concerns

2001/09/12 : 9/11 Terrorist AttacksA2001/10/08 : U.S. invades Afghanistan

A2002/09/25: War Fears U.S. / IraqA2003/03/19: Beginning of the Iraq War

A2004/03/23: Assassination of Sheik Yassin, Middle East TensionsA2004/08/03: Terrorist threats in New York and Washington

A2005/07/08: London Bombings 7/7

A2006/08/11: Transatlantic Aircraft PlotA2007/05/01: War and Terrorism Concerns, Protests in Turkey

A2008/08/12: South Ossetian War Escalation

A2009/12/29 : Flight 253 Failed Bombing Attempt

A2011/05/03: U.S. Announces Death of Osama Bin Laden

A2013/08/28 : Escalation of Syrian CrisisA2014/03/04: Russia invades CrimeaA2014/09/02 : Escalation Ukraine/Russia

A2015/11/17: Paris Terrorist Attacks

A2016/07/07: Middle East Concerns; Chilcot Report ReleasedA2016/07/16: Turkish Coup Attempt

A2017/08/10: Escalation of Tensions Between U.S. and North Korea


The Historical Geopolitical Risk Index

0

100

200

300

400

500

600

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

GPR Historical

Index (2000-2009 = 100)

Second B

oer

War

and B

oxer

Rebelli

on

Begin

nin

g o

f R

ussia

n-J

apanese W

ar

First B

alk

an W

ar

Begin

sW

W1 B

egin

s

US

Join

s W

W1

Japan a

ttacks S

hanghai and N

ankin

g

Italia

n Invasio

n o

f E

thio

pia

Hitle

r th

reate

ns C

zechoslo

vakia

Begin

nin

g o

f W

WII

Attack o

n P

earl H

arb

or

Escala

tion o

f K

ore

an W

ar

Suez C

risis

Second T

aiw

an S

trait C

risis

Sovie

t U

nio

n R

esum

es N

ucle

ar

Tests

Cuban M

issile

Crisis

Mid

dle

East T

ensio

ns p

re-6

Day W

ar

Vie

tnam

War:

First B

attle

of Q

uang T

riY

om

Kip

pur

War

Gra

in E

mbarg

o a

gain

st U

SS

R

Falk

lands W

ar

Begin

sA

ble

Arc

her

83

US

Bom

bin

g o

f Lib

ya

Gulf W

ar

US

Bom

bin

g o

f Ir

aq

9/1

1Ir

aq Invasio

n

Russia

annexes C

rim

ea

Decomposition by topic


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 break the index down into:

I Geopolitical Threats (GPT): Search categories 1 to 4;

I Geopolitical Acts (GPA): Search categories 5 to 6.

Main idea: Many spikes in GPT and GPA associated with realizationof geopolitical acts...

... Yet, some movements in GPT may happen when no underlying actmaterializes.


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


Full sample


Geopolitical Risk and Economic Activity

GPR is Exogenous.

GPR predicts economic activity (forecasting regressions and VAR).

Threats matter more than acts (VAR).

Effects of GPR stronger in industries more exposed to GPR.


Granger Tests: Specification

Granger-causality tests based on:

LGPRt = α +p

∑i=1

βiLGPRt−i +p

∑i=1

Γ′M,iMt−i +p

∑i=1

Γ′F ,iFt−i +p

∑i=1

Γ′U,iUt−i + εGPRt

A test that xt does not Granger-cause LGPRt is an F-test ofH0 : Γx ,i = 0, ∀i .

Macro variables (Mt): ∆IP, ∆employment, real oil price.

Financial variables (Ft): Return on S&P500, 2-year Treasury yield.

Uncertainty variables (Ut): LEPU, LVXO.

Sample: 1985M1-2017M12; p = 3.


Granger Tests: Results

Table 1: Exogeneity of Geopolitical Risk

(1) (2) (3)

Variables LGPR LGPRA LGPRT

Macro 1.18 0.94 1.38[ 0.31] [ 0.49] [ 0.20]

Financial 1.33 0.82 1.26[ 0.24] [ 0.55] [ 0.28]

Uncertainty 1.08 0.72 1.46[ 0.38] [ 0.63] [ 0.19]

LGPR 139.67***[ 0.00]

LGPRA 27.67*** 1.22[ 0.00] [ 0.30]

LGPRT 3.21** 121.46***[ 0.02] [ 0.00]

Adj. R2 0.66 0.39 0.67

Macro, financial and uncertainty variables do not predict GPR.


Forecasting Regressions: Specification

Do shocks to GPR predict future changes in investment?

Estimate univariate forecasting specification:

∆BFIt+h = α + βGPRh εGPRt +

p

∑i=1

Γt−iXt−i + νt+h

,

∆BFIt+h: Change in log quarterly business fixed investment betweent − 1 and t + h.

Xt = EPUt , ∆BFIt , ∆EMPt ; p = 2.

εGPRt is the residual from exogeneity regression underΓM,i = ΓF ,i = ΓU,i = 0 ∀i .


Forecasting Regressions: Results

Table 2: Geopolitical Risk and Business Fixed Investment

(1) (2) (3) (4) (5) (6)Business Fixed Investment (∆BFIt+h) h = 1 h = 2 h = 4

GPR -0.97*** -1.27*** -1.81***[2.84] [2.86] [2.89]

GPRA -0.48 -0.46 -0.02[1.34] [0.72] [0.02]

GPRT -0.79** -0.99** -1.64**[2.28] [2.27] [2.49]

Controls YES YES YES YES YES YESN 128 128 127 127 125 125

Coefficients in the table report the impact of a 2-SD rise in εGPRt .


Quarterly VARs: Specification and Identification

To get a broader perspective on the transmission of changes in GPR,we estimate quarterly VAR models.

GPR Specification: LGPR, LEPU, BFI, EMP, S&P500, T02YR.

Acts vs. Threats: Replace LGPR with LGPRA & LGPRT

Identification (I): Cholesky with GPR indexes ordered before economicvariables ⇒ Contemporanous exogeneity.

Identification (II): LGPRA ordered 1st and LGPRT 2nd in CholeskyI GPRA shocks can be a convolution of shocks to first and higher

moments of geopolitical events distribution.

I GPRT shocks capture primarily shocks to uncertainty and risk.

Sample: 1985Q1-2017Q4

Monthly VAR Results


Quarterly VAR: 2-SD GPR Shock

0

20

40

60

80

100

0 4 8 12

PercentA. GPR

−20

−10

0

10

20

0 4 8 12

PercentB. EPU

−10

−5

0

5

10

0 4 8 12

PercentC. S&P 500

−4

−2

0

2

4

0 4 8 12

PercentD. Consumer Sentiment

−4

−2

0

2

4

0 4 8 12

PercentE. Business Fixed Investment

−1.5

−1.0

−0.5

0.0

0.5

1.0

0 4 8 12

PercentF. Employment

−0.4

−0.2

0.0

0.2

0.4

0 4 8 12

PercentG. Two−Year Yield

−12

−5

2

9

16

0 4 8 12

PercentH. Oil Price


Quarterly VAR: 2-SD GPRA Shock

0

20

40

60

80

100

0 4 8 12

Response GPR ActsResponse GPR Threats

PercentA. GPR Acts & Threats

−20

−10

0

10

20

0 4 8 12

PercentB. EPU

−10

−5

0

5

10

0 4 8 12

PercentC. S&P 500

−4

−2

0

2

4

0 4 8 12


−4

−2

0

2

4

0 4 8 12


−1.5

−1.0

−0.5

0.0

0.5

1.0

0 4 8 12


−0.4

−0.2

0.0

0.2

0.4

0 4 8 12


−12

−5

2

9

16

0 4 8 12

PercentH. Oil Price


Quarterly VAR: 2-SD GPRT Shock

0

20

40

60

80

100

0 4 8 12

Response GPR ThreatsResponse GPR Acts

PercentA. GPR Acts & Threats

−20

−10

0

10

20

0 4 8 12

PercentB. EPU

−10

−5

0

5

10

0 4 8 12

PercentC. S&P 500

−4

−2

0

2

4

0 4 8 12


−4

−2

0

2

4

0 4 8 12


−1.5

−1.0

−0.5

0.0

0.5

1.0

0 4 8 12


−0.4

−0.2

0.0

0.2

0.4

0 4 8 12


−12

−5

2

9

16

0 4 8 12

PercentH. Oil Price


Firm-Level Effects on Investment

Two questions:I Do firms in industries more exposed to aggregate geopolitical risks

experience a larger decline in investment?

I Are there idiosyncratic geopolitical risk events that drive variation ininvestment at the firm level?

Conceptual framework:

GPRi ,t = GPRt + GPRtΛk,t + Zi ,t .

Λk,t is industry-exposure to aggregate GPR

Zi ,t is pure idiosyncratic risk.

We want to measure the cross-industry and within-industry effects ofGPRtΛk,t and Zi ,t on firm investment


Industry Effects of Geopolitical RiskConstruction of Industry Exposure

Construct stock-market based measure of industry exposure togeopolitical risk using daily regressions:

Rk,s = αk + βk∆GPRTs + γkRMs + εk,s ,

10-year window rolled one quarter at time.

Use Fama-French 48 industry groups.

Λk,t : Minus beta lagged by one quarter.

I Most exposed (negative beta): Entertain, Transportation, Textiles.

I Least exposed (positive beta): Gold, Oil, Defense. Industry Exposure


Industry Effects of Geopolitical RiskIndustry Regressions

Let ik denote firm CapEx divided by property, plant and equipment.We estimate, for h = 0, ..., 6:

log iki ,t+h − log iki ,t−1 = αi + αt + βh (GPRt Λk,t) + Xi,t + ε i ,t

βh: differential response of log ik in t + h to GPR in quarter t

αi and αt : firm and time fixed effects

Xi,t : firm cash flows and Tobin’s Q.

Drop financial firms and utilities, HQ outside US, small firms(PPENTQ less than $5 million).


Industry Effects of Geopolitical Risk

Experiment: 2sd aggregate GPR shock hitting a firm in an industrywith 1sd exposure above average.

In the four quarters after the shock, firm experiences a differentialdecline in investment about 2 p.p. larger than the average decline.


Industry Effects of Geopolitical Risk

From VAR: A 2sd GPR shock reduces aggregate investment by 1.8%.

From firm-level regressions calculate differential effects acrossindustries:

I Entertainment industry: 3.8 % decline in investment (-1.8% -2%)

I Defense industry: 0.2 % increase in investment (-1.8% +2%)

Effects of GPR can be twice as large as the VAR for industries 1sdmore exposed, and close to zero for industries 1sd less exposed.


What Drives Industry Exposure Λk ,t?

1. Macro Exposure. Firms in cyclical sectors may be more vulnerable ifgeopolitical risks weigh on aggregate demand.(Cyclicality = industry sensitivity of investment to aggregate demand)

2. Openness. Geopolitical risks may lead to embargoes, expropriation,trade wars, reducing demand for foreign-oriented firms.

3. Leverage. If geopolitical risks increase disaster probability, leveredindustries could be more impacted (Gourio, 2013). Disaster-Risk

Regressing Industry Exposure on these three variables gives:

Λk,t = 0.203(0.096)

MacroExpk + 0.177(0.091)

Opennessk,t−4 + 0.234(0.074)

Leveragek,t−4


Measuring Firm-Level GPR: Textual Analysis

Two steps:

1. Search the earnings call transcripts for geopolitical (GP) terms

I E.g., war*, militar*, terror*, conflict*

I Frequency of GP matches indicates the intensity of trade policydiscussions in a conference call

2. Search for risk (R) terms in close proximity to GP terms

I E.g., risk*, threat*, tension*, uncertain*

I Must appear within 10 words

GPRi = Number of joint instances of GP and R (normalized bynumber of words in the call)


Firms’ Earnings Calls

Terrorist Attacks in 2005 (2005Q3):

Terrorism including the London bombings have impacted our consumertravel businesses. Whether it is declining consumer confidence or an actualslowdown in the travel economy, it is too soon to tell. But the impact isslower growth across our segments of the markets. Cendant Corporation

Russia - Ukraine tensions (2014 Q3):

As a global company, we continuously monitor the changing geopoliticalenvironments in areas in which Capstone is doing or plans to do business.The largest potential impact is definitely Russia and the ongoing tensions inthe Ukraine. Capstone Turbine Corp

North Korea - US tensions (2017 Q2):

And there’s still tremendous geopolitical uncertainty around the world thatwe’re keeping our eye on and want to make sure I think before we would takeanother step that we’re comfortable about sustainability of the order ratesversus what we saw in the first quarter. Caterpillar


Firm-Level Geopolitical Risk

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

GPR

i Sha

re

2005 2007 2009 2011 2013 2015 2017 2019

Pepsico Inc

Total Sa

Walmart Inc


Quantifying the Effects of Firm-Level GPR onInvestment

We estimate, for h = 0, ..., 6:

log iki ,t+h − log iki ,t−1 = αi + αk,t + γh Zi ,t + Xi ,t + ε i ,t

αi and αk,t : firm and industry-time fixed effects

γh: response of log ik in t + h to change in TPU in quarter t

Xi,t are firm-level controls: cash flows and Tobin’s Q.


Firm-Level Response to Idiosyncratic GPR


Conclusions

We construct a quantitative measure of geopolitical risk.

Geopolitical risk is largely exogenous to the US economy.

Geopolitical risk has adverse negative effects on real activity in theUnited States, including investment.I The effect on investment varies across firms and industries.

Adverse effects of geopolitical risk are mostly driven by the threat ofadverse geopolitical events.

On our GPR webpage—together with all data for the US—you canalso find a beta version of the GPR index for many other countries.


Available Indices 1: Doomsday Clock


Available Indices 2: Geopolitical Heat Maps

Back


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

Back


Human vs GPR Index

1985 1990 1995 2000 2005 2010 20150

100

200

300

400

500

600

GPR IndexHuman Index

Back


The Historical Geopolitical Risk Index: Components

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100

100

200

300

400

500

600

His

toric

al In

dex

(200

0-20

09=

100)

Words in the Historical Index

Geopolitical ThreatsNuclear ThreatsWar ThreatsWar ActsTerrorist ThreatsTerrorist Acts

Back


GPR and VIX 0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 201750

100

150

200

250

GPR vs EPUEPU GPR

US bombs Libya

Kuwait Invasion Madrid

bombings

London bombings

Transatlanticaircraft plot


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 CliffGovt. Shutdown

0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 20170

10

20

30

40

50

60

70

80

90

GPR vs VIXVIX GPR

BlackMonday

KuwaitInvasion

AsianFinancial

Crisis LTCM

9/11

2002correction

Iraqinvasion

Lehman Euro crisis

Back


GPR and Sports Event Index

Sorry, I could not refrain from throwing in some coverage of the World Cupat some point...

1985 1990 1995 2000 2005 2010 20150

100

200

300

400

500

600

Inde

xes:

200

0-20

09 =

100

GPRSport Events Index

GPR index uncorrelated with other newsworthy predictable (World Cup,Olympics, SuperBowl) and unpredictable events.

Back


GPR and Newspaper Slant

1985 1990 1995 2000 2005 2010 20150

100

200

300

400

500

600

Inde

xes:

200

0-20

09 =

100

GPR Left-Leaning NewspapersGPR Right-Leaning Newspapers

GPR Index does not reflect newspaper political slant. Back


Geopolitical Threats vs Geopolitical ActsCorrelation coefficient: 0.60

0

100

200

300

400

500

600

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

GPR THREATS AND ACTSIndex (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


ISIS Escalation

Paris attacks

Back


Monthly VAR: Shocks and Persistence

0

20

40

60

80

100

0 6 12 18 24

GPR Shock

PercentA. GPR

0

20

40

60

80

100

0 6 12 18 24

GPR Acts ShockGPR Threats Shock

PercentB. GPR Acts

0

20

40

60

80

100

0 6 12 18 24

PercentC. GPR Threats

Back


Monthly VAR: Macro and Financial Effects

−0.4

−0.2

0.0

0.2

0.4

0 6 12 18 24

GPR ShockGPR Acts ShockGPR Threats Shock

PercentA. Employment

−1.0

−0.5

0.0

0.5

0 6 12 18 24

PercentB. Industrial Production

−3

−2

−1

0

1

0 6 12 18 24

PercentC. Trade

−5

0

5

10

15

0 6 12 18 24

PercentD. EPU

−4

−2

0

2

0 6 12 18 24

PercentE. S&P 500

−8

−4

0

4

8

0 6 12 18 24

PercentF. Oil Price

Back


Monthly VAR Robustness: VXO

0

20

40

60

80

100

0 6 12 18 24

PercentA. GPR

−5

0

5

10

0 6 12 18 24

PercentB. VXO

−0.4

−0.2

0.0

0.2

0.4

0 6 12 18 24

PercentC. Employment

−1.0

−0.5

0.0

0.5

0 6 12 18 24

PercentD. Industrial Production

−3

−2

−1

0

1

0 6 12 18 24

PercentE. Trade

−4

−2

0

2

0 6 12 18 24

PercentF. S&P 500

−8

−4

0

4

8

0 6 12 18 24

PercentG. Oil Price

−0.2

0.0

0.2

0.4

0 6 12 18 24

PercentH. 2−Year Yield

Back


Monthly VAR Robustness: GPR Ordered Last

0

20

40

60

80

100

0 6 12 18 24

PercentA. GPR

−5

0

5

10

15

0 6 12 18 24

PercentB. EPU

−0.4

−0.2

0.0

0.2

0.4

0 6 12 18 24


−1.0

−0.5

0.0

0.5

0 6 12 18 24


−3

−2

−1

0

1

0 6 12 18 24

PercentE. Trade

−4

−2

0

2

0 6 12 18 24

PercentF. S&P 500

−8

−4

0

4

8

0 6 12 18 24

PercentG. Oil Price

−0.2

0.0

0.2

0.4

0 6 12 18 24


Back


Monthly VAR Robustness: Exclude 9/11

●

●

●●

●

●

●

●

●

●

●

●

●

●

●

●●

●●

● ● ● ● ● ●

●

●

● ● ●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

●

●

● ● ●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●0

40

80

120

160

0 6 12 18 24

●●●

Baseline9/11 DummyCensored GPR

PercentA. GPR

●

●●

●

● ● ●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−5

0

5

10

15

0 6 12 18 24

PercentB. EPU

● ● ●●

●●

● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−0.4

−0.2

0.0

0.2

0.4

0 6 12 18 24


●

●

●●

●●

●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−1.0

−0.5

0.0

0.5

0 6 12 18 24


●

●●

●

●●

●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−3

−2

−1

0

1

0 6 12 18 24

PercentE. Trade

●

●

● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−4

−2

0

2

0 6 12 18 24

PercentF. S&P 500

●●

●

●●

● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−8

−4

0

4

8

0 6 12 18 24

PercentG. Oil Price

● ●● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

−0.2

0.0

0.2

0.4

0 6 12 18 24


Back


Industry Exposure to GPR

Fabricated ProductsMedical Equipment

Tobacco ProductsEntertainment

Pharmaceutical ProductsCoalAlmost Nothing

Industrial Metal MiningTransportation

Automobiles and TrucksRubber and Plastic Products

HealthcareCommunicationRecreation

AircraftConstruction Materials

Restaurants, Hotels, MotelsChemicalsApparel

Business SuppliesConsumer Goods

Computer SoftwareBankingConstructionInsuranceRetail

TradingFood Products

Shipbuilding, Railroad EquipmentCandy & SodaWholesale

AgricultureMachinery

Real EstateElectrical Equipment

ComputersShipping Containers

Printing and PublishingDefense

Measuring and Control EquipmentElectronic Equipment

TextilesUtilities

Steel Works EtcBeer & Liquor

Precious MetalsPetroleum and Natural Gas

-4 -2 0 2 4Average Exposure

Average 1995-2017, standardized. Higher values indicate larger decline inindustry daily stock returns after increase in daily GPR. Back


Geopolitical Risk and the Berlin WallNewspaper coverage in November 1989


Historical GPR Index and Disaster Probability

1900 1920 1940 1960 1980 20000

50

100

150

200

250

300

350

His

toric

al In

dex

(200

0-20

09=

100)

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Dis

aste

r P

roba

bilit

y, W

acht

er 2

013

GPRHVARDisaster Probability

Annualized Historical GPR and Annualized Time-Varying DisasterProbability constructed by Wachter (2013) using the price-dividend ratio.

Back

Documents

Measuring Geopolitical Risk · GPR exogenous to U.S. macroeconomic conditions. Higher GPR reduces investment, employment, and stock returns. E ects mostly driven bythreatof adverse