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

A bank's risk team compares a news-based geopolitical risk index with market-implied measures of uncertainty. Which statement best describes a limitation they should recognize when using the news-based index as a risk input in a stress test?

A news-based index measures media attention to geopolitical events, so it can spike on salient events without a proportional financial impact and can lag risks not yet covered in the press. It is available monthly and is not collinear with equity volatility.

  1. AIt cannot be computed at a monthly frequency
  2. BIt reflects media attention and perceived risk, so it may spike on salient events without implying a proportional financial impact, and may be slow to capture emerging unreported risksCorrect
  3. CIt is perfectly collinear with equity market volatility, so adds no information
  4. DIt is available only for advanced economies and never for emerging markets

Explanation

A text-based index measures attention in news coverage, so it can overreact to salient events or miss risks not yet covered. It is available monthly and for many countries, and it is not perfectly collinear with volatility measures. The correct option identifies the genuine measurement limitation.

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