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

A risk analyst at a global asset manager wants a news-based, high-frequency gauge of geopolitical tension to feed into a market risk dashboard. Which of the following best describes the construction of the Caldara-Iacoviello Geopolitical Risk (GPR) index used in IMF analysis of geopolitical risk?

The GPR index is built from newspaper text. It measures the share of articles in major newspapers that discuss adverse geopolitical events, such as wars, terrorist acts and tensions. It is not based on market prices, credit ratings or oil volatility, so a text-count description is correct.

  1. AIt counts the share of newspaper articles that discuss adverse geopolitical events and threatsCorrect
  2. BIt averages sovereign credit rating downgrades across emerging market economies
  3. CIt measures the implied volatility of crude oil options over a rolling window
  4. DIt is the first principal component of global equity market returns

Explanation

The GPR index is text-based: it counts the share of articles in major international newspapers containing words tied to geopolitical tensions, wars, terrorism and related threats. The other options describe market-price or ratings-based measures, which are not how the GPR is built.

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