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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, text-based gauge of geopolitical tension that can be tracked back several decades and compared across countries. Which type of measure is the Geopolitical Risk (GPR) index, as used in the IMF's April 2025 analysis of geopolitical risk?

The GPR index is a text-based measure that counts the share of newspaper articles discussing adverse geopolitical events such as wars, terrorism and tensions. It is not built from market prices or annual conflict counts, which is why it can be tracked monthly over long histories.

  1. AAn index built by counting newspaper articles that discuss adverse geopolitical events and threatsCorrect
  2. BAn index derived from the implied volatility of sovereign credit default swaps
  3. CAn index based on the share of countries with active military conflicts in a given year
  4. DAn index computed from the yields spread between safe-haven and risky government bonds

Explanation

The GPR index is a news-based measure that counts the share of articles in major newspapers mentioning geopolitical tensions, wars, terrorism and related threats. It is not market-price based, so CDS volatility or bond spread constructions are wrong. It also is not an annual conflict count, since it is available monthly.

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