Geopolitical Shock Index

Overview

This pillar analyzes geopolitical risk by tracking conflicts, trade disputes, and political instability. It models the historical impact of these shocks on financial index volatility, providing a data-driven view on global risk.

What It Does

The Geopolitical Shock Index synthesizes data from established risk indices, news sentiment, and commodity markets. It correlates historical spikes in geopolitical tension with corresponding movements in market volatility indicators like the VIX. The model then generates a forward-looking score that quantifies the potential for a market shock based on current events.

Why It Matters

Markets often underprice tail risk from geopolitical events until it's too late. This pillar provides an early warning system, translating ambiguous headlines into a measurable impact score that can inform hedging strategies and volatility positions.

How It Works

First, it ingests daily data from sources like the Geopolitical Risk (GPR) Index and oil market reports. Second, it uses a historical model to map GPR index levels to expected changes in the S&P 500 and VIX over the following 5-20 trading days. Finally, it combines this with real-time news sentiment to adjust the risk level, producing a final shock probability.

Methodology

The core analysis uses a Vector Autoregression (VAR) model to quantify the relationship between the Caldara and Iacoviello Geopolitical Risk (GPR) Index and the CBOE Volatility Index (VIX). The model is trained on monthly data from 1990 to the present. Real-time signals are incorporated using a sentiment score derived from news APIs, which acts as a weighting factor on the latest GPR reading.

Edge & Advantage

It provides a quantitative framework for a typically qualitative subject, allowing traders to react to global tensions based on data, not just headlines.

Key Indicators

• Geopolitical Risk Index (GPR)

  high

  Measures the frequency of news articles discussing adverse geopolitical events and threats.

• Oil Supply Disruption Risk

  high

  Tracks potential chokepoints and conflict in oil-producing regions, a key economic input.

• Defense Sector Relative Strength

  medium

  Compares performance of defense stocks (e.g., ITA ETF) to the broader market as an indicator of rising tensions.

Data Sources

• Federal Reserve Economic Data (FRED)

  Provides the monthly Geopolitical Risk (GPR) Index data series.

• GDELT Project

  Monitors global news media for sentiment analysis on conflict and instability keywords.

• Energy Information Administration (EIA)

  Offers reports on global oil production, inventories, and potential supply disruptions.

Example Questions This Pillar Answers

• → Will the VIX close above 30 in the next month?
• → Will the S&P 500 fall by more than 5% in a single week this quarter?
• → Will oil prices (WTI) exceed $100 per barrel following a major Middle East event?

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