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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 an asset manager wants a monthly, news-based measure of geopolitical tension to include in a market risk dashboard. Which description best fits the Geopolitical Risk (GPR) index of Caldara and Iacoviello that the IMF's April 2025 GFSR uses to gauge geopolitical risk?

The GPR index is a news-based measure that counts the share of newspaper articles discussing adverse geopolitical events such as wars, terrorism and interstate tensions. It is text-derived rather than built from market prices or spending data, so it can capture tension independently of asset-market reactions.

  1. AAn index built by counting the share of newspaper articles that discuss adverse geopolitical events such as wars, terrorist acts and tensions between statesCorrect
  2. BAn index derived from the implied volatility of sovereign bond options across emerging markets
  3. CAn index built from the quarterly change in global military spending as a share of GDP
  4. DAn index of credit default swap spreads on the five largest defence contractors

Explanation

The GPR index is a text-based measure that counts the share of articles in major newspapers mentioning adverse geopolitical events and tensions. It is not built from market prices, such as bond option volatility or CDS spreads, nor from military spending data.

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