Global | Geopolitical risk and economic policy uncertainty

Summary

The increasingly volatile geopolitical landscape and the rapid advance of artificial intelligence have turned geopolitical risk and economic policy uncertainty indices into essential tools. But what do they measure and how do they do it?

Key points

• Key points:
• Artificial intelligence and natural language processing can be used to convert text into numerical data in order to measure political, economic or geopolitical uncertainty.
• These indices reflect media coverage and its impact on risk perception: they assume that the more an issue is commented, the greater the uncertainty; conversely if it loses coverage, concern diminishes.
• The Geopolitical Risk (GPR) Index, devised by Caldara and Iacoviello in 2022, measures how often the media mention adverse geopolitical events in relation to total news. They measure coverage of news but not sentiment or tone.
• While coverage and sentiment tend to coincide, this is not always the case. Recent examples of this include coverage of the conflicts between Russia and Ukraine, Israel and Hamas, and tensions in Iran and Syria.
• At BBVA Research we take a different approach to this constraint: we combine coverage with sentiment analysis. It is not only what is said that matters, but how it is said. If sentiment stays negative or neutral and coverage grows, then so does the risk.

Geographies

Topics

Tags