Measuring Geopolitical Risk
2022/03/31 by Dario Caldara, Matteo Iacoviello · 63 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Economic Sanctions and International Relations #Market Dynamics and Volatility #Risk Management in Financial Firms
paper · doi:10.1257/aer.20191823
openalex publication_date 2022/03/31 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/31
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. (JEL C43, E32, F51, F52, G31, H56, N40)
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