FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

Geopolitical Risk Measurement and the GPR Index

Updated 11 October 2026 · Fact-checked

Geopolitical risk is measured mainly by counting news. The Caldara-Iacoviello GPR index tracks the share of articles in major newspapers that discuss adverse geopolitical events, scaled so the 2000-2009 average is 100. Threats (war, nuclear, terror threats, buildups) are separated from acts (war starts, escalation, terror acts). A higher value means more attention to risk.

Understand Geopolitical Risk Measurement and the GPR Index

Geopolitical risk is the risk that wars, terrorism, and tensions between states disrupt markets and the economy. You cannot observe it directly, so researchers need a proxy. The most cited proxy is a news-based index.

The Caldara-Iacoviello GPR index works by text search. Researchers scan articles in a set of leading international newspapers and count the articles that discuss adverse geopolitical events. They divide that count by all articles published in the same period. The result is the share of coverage about geopolitical tension. The share is then scaled so that the average over 2000-2009 equals 100.

The search terms fall into eight categories. Five of them describe threats: war threats, peace threats, military buildups, nuclear threats and terror threats. Three describe acts: beginning of war, escalation of war and terror acts. Together they make the headline index. Separate sub-indices exist for threats (GPR Threats) and acts (GPR Acts).

The split matters. A threat is a risk that something may happen: tension, warnings, buildups. An act is an event that has happened: a war starting, a conflict escalating, an attack. Acts tend to produce sharp spikes in the index. Threats can build up and last longer, because uncertainty stays high while nothing is resolved.

The index measures media attention to risk, not realised losses or a market price of risk. It does not say which way prices will move. In FRM Part II you use it as an input: it shows when geopolitical risk is elevated, and you then link that to asset prices, portfolio flows, funding and stress scenarios. Country-level versions also exist for local risk.

Key formulas to remember

GPR index construction: GPR(t) = [articles in period t matching geopolitical-risk terms ÷ all articles in period t] × scaling constant; The constant is chosen so the 2000-2009 average equals 100. Verbal construction is what the exam tests, not computation of raw counts.
Reading the index level: Index value ÷ 100 = multiple of the 2000-2009 average level of geopolitical coverage; A value of 200 means coverage share is twice the base-period average. It is not 'twice the actual risk' in a loss sense.
Percentage change: % change = (GPR new − GPR old) ÷ GPR old × 100; Use this to compare a spike with the prior level.
Threats vs acts: Threats = war threats, peace threats, military buildups, nuclear threats, terror threats. Acts = beginning of war, escalation of war, terror acts; Threats are risks that an event may occur. Acts are events that have occurred.
Limitations to remember: News-based proxy: measures attention, not direction, loss or probability; It depends on which newspapers and keywords are used, and media attention can lag or exaggerate events.

How to solve Geopolitical Risk Measurement and the GPR Index questions

Use this sequence for any question on how geopolitical risk is measured or interpreted.

1Identify what the question asks: how the index is built, how to read a value, or how to classify an event.
2If it is about construction, state it: share of articles in leading newspapers on adverse geopolitical events, scaled to 100 over 2000-2009.
3If it is a number, convert it to a multiple of the base (value ÷ 100) or a percentage change from the previous value.
4If it is a classification, ask: has the event happened (act) or is it a warning, buildup or tension (threat)?
5Match the event to a category: war, nuclear, terror, military buildup or peace-related.
6Interpret carefully: a high value means more attention to geopolitical risk, not a measured loss or a forecast of price direction.
7Add the finance link if the question asks for it: asset prices, investor flows, funding conditions, or stress scenarios.
8Check the options for overstatements such as 'measures actual losses' or 'is a market-implied probability' and reject them.

Quickest way: Three-question screen

When to use it: Use when you have about a minute and the options look similar.

Is it a news-count measure? If the option talks about market prices or realised losses as the core input, it is wrong for GPR.
Has the event occurred? Yes means act. No, only tension or warning, means threat.
Is the interpretation modest? Pick the option that says the index reflects attention to risk, not direct loss or direction of returns.

Common mistakes in Geopolitical Risk Measurement and the GPR Index

Saying the GPR index is built from market prices or volatility.
Most risk measures in the paper are market-based, so students assume this one is too.
Fix: Remember it is a text-search index: a share of newspaper articles.
Classifying a terror attack that has happened as a threat.
Students link terror with danger and ignore timing.
Fix: Ask whether the event occurred. Terror acts are acts. Terror threats are threats.
Reading an index of 150 as 150% higher than the base.
Confusing the level with a percentage change.
Fix: 150 means 1.5 times the base average, which is 50% above it.
Treating the index as a forecast of falling prices.
Elevated risk sounds like bad returns.
Fix: The index shows attention to risk. The effect on assets is a separate empirical question and varies by asset and country.
Putting peace threats or military buildups under acts.
They sound like actions.
Fix: Both sit in the threat group. Acts are only war beginning, war escalation and terror acts.
Ignoring limitations such as media dependence and the keyword approach.
Students memorise construction but not weaknesses.
Fix: Note that coverage can lag, overstate or understate events, and depends on the chosen newspapers and terms.

Worked examples

Example 1

The base-period (2000-2009) average share of articles matching geopolitical-risk terms is 0.50%. In one month, 1.20% of articles match. Assuming the index is scaled to 100 at the base average, what is the GPR value and how do you read it?

Show the solution

The index equals the current share divided by the base average share, times 100.
1.20 ÷ 0.50 = 2.4.
2.4 × 100 = 240.
Reading: coverage of adverse geopolitical events is 2.4 times the base-period average, which is 140% above it.

Answer: GPR = 240. Geopolitical coverage is 2.4 times the 2000-2009 average. This shows high attention to risk, not a measured loss.

Example 2

A risk report notes that GPR Acts jumped after an armed conflict began, while GPR Threats had already been rising for two months because of a military buildup and nuclear warnings. Classify each driver and explain what the pattern tells you.

Show the solution

The military buildup and nuclear warnings are events that signal possible conflict but have not hit yet, so they are threats.
The start of the armed conflict is the beginning of a war, so it is an act.
The rise in GPR Threats before the conflict shows rising tension and uncertainty ahead of the event.
The jump in GPR Acts reflects the event itself, which usually produces a sharp spike.
For risk management, the threats rise gives early warning for scenario analysis and hedging, while the act signals the shock has arrived.

Answer: The buildup and nuclear warnings are threats. The war beginning is an act. Rising threats gave early warning, and the act produced the spike. Both are measures of news attention, not of realised losses.

Exam tips

Expect questions that ask which items are threats and which are acts. Memorise the eight categories as 5 threats and 3 acts.
Watch for options that call the GPR a market-based or loss-based measure. It is a news-count index.
Questions often test interpretation, so choose the answer that links the index to attention and uncertainty, not to guaranteed price moves.
Know that the index is scaled to 100 for 2000-2009, and be ready to convert a value to a multiple or percentage change.
Link the measure to its use: early warning, scenario design and stress testing.

Practice questions from Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

Geopolitical Risk Measurement and the GPR Index: frequently asked questions

What is the Caldara-Iacoviello GPR index?

It is a news-based index of geopolitical risk. It measures the share of articles in leading international newspapers that discuss adverse geopolitical events, scaled to 100 over 2000-2009.

What is the difference between geopolitical threats and geopolitical acts?

Threats are risks that an event may happen, such as war threats, military buildups, nuclear threats and terror threats. Acts are events that have occurred, such as the beginning or escalation of a war or terror acts.

How is geopolitical risk measured in financial markets?

The most common proxy is the GPR index, which counts news coverage. Analysts then study how changes in the index relate to asset prices, flows and funding conditions. Market-based indicators can be used alongside it.

Does a high GPR value mean markets will fall?

No. A high value means more attention to geopolitical risk. The effect on markets depends on the asset, the country and the type of event, so treat it as a risk signal, not a price forecast.