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

The IMF's April 2025 analysis examines how elevated geopolitical risk affects financial markets and institutions. Which finding is most consistent with that analysis?

The analysis finds that higher geopolitical risk raises downside risks to equity returns and can trigger capital outflows from emerging markets, especially those with vulnerabilities. It also can affect banks, so the effects are not limited to commodities, and spreads do not narrow because of safe-haven inflows.

  1. AHigher geopolitical risk is associated with lower tail risk for equity returns
  2. BHigher geopolitical risk can raise downside risks to equity returns and increase capital outflows from emerging markets, particularly where vulnerabilities are presentCorrect
  3. CGeopolitical risk affects only commodity prices and has no link to bank balance sheets
  4. DGeopolitical risk reduces sovereign spreads in emerging markets because of safe-haven flows into them

Explanation

The chapter finds that heightened geopolitical risk is associated with greater downside risk to equity returns and with portfolio outflows, especially for emerging markets with weaker fundamentals, and can affect banks. The other options reverse or understate these effects.

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