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

A portfolio manager wants to use the GPR index to anticipate asset-price effects of geopolitical shocks. Which limitation of a news-based index should she most keep in mind?

The main limitation is that a news-based index measures media attention and perceived threat, which may differ from actual economic damage. It can spike on fears that never materialize. It is not annual, not restricted to one country, and not built from bond yields.

  1. AIt may reflect media attention and sentiment, so it can spike on perceived threats and may not map one-to-one to realized economic damageCorrect
  2. BIt is only available at annual frequency, so it cannot capture short-lived episodes
  3. CIt excludes any events outside of the country where the newspapers are published
  4. DIt is computed from bond yields, so it is contaminated by monetary policy

Explanation

A text-based index captures how much geopolitical risk is being discussed, including threats and fears, so its level need not equal realized damage. The index is available at monthly and daily frequency, covers global events, and is not derived from bond yields, which rules out the other options.

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