| name | geopolitical-risk |
| description | Geopolitical risk analysis: quantify crisis signals, identify precursors, and build event-driven strategies for war, sanctions, and supply disruption scenarios. |
| category | tool |
Geopolitical Risk Analysis
Overview
Quantify geopolitical risk signals, identify crisis precursors, and build event-driven strategies that convert narratives such as "war / conflict / sanctions / supply disruption" into actionable multi-asset allocation decisions.
Core Analytical Framework
1. Risk Layering Model
Layer 1: Structural risk (long-lasting, slow-moving)
└── Great-power rivalry, alliance structures, nuclear deterrence balance
Layer 2: Situational risk (cyclical escalation, monthly / quarterly scale)
└── Military exercises, election cycles, sanctions escalation, diplomatic friction
Layer 3: Event risk (sudden shocks, daily / hourly scale)
└── Military action, assassination, sanctions announcements, nuclear tests
2. Five Dimensions of Risk Assessment
| Dimension | Description | Quantitative Proxy |
|---|
| Intensity | Severity of conflict / sanctions | GPR Index percentile |
| Persistence | Expected duration of the crisis | Futures curve contango / backwardation |
| Transmission | Spillover into supply chains / finance | CDS spread widening, VIX jump magnitude |
| Predictability | Whether the event is already priced in | Option implied volatility skew |
| Reversibility | Whether the situation can be resolved through negotiation | Speed of reversal in news sentiment |
Monitoring the Six Major Global Geopolitical Hotspots
1. Strait of Hormuz — Oil Transport Chokepoint
Strategic significance
- Roughly 20% of global oil supply (about 17 million barrels/day) and 20% of LNG passes through it
- Iran has the ability to disrupt the strait through mines, naval assets, and shore-based missiles
- It is the only export route for Gulf states such as Saudi Arabia, the UAE, Kuwait, and Iraq
Risk triggers
- Escalation in U.S.-Iran tensions, such as failed nuclear talks or tighter sanctions
- Tankers being seized or attacked
- Iranian blockade drills during military exercises
Key monitoring indicators
- Brent-WTI spread widening (signal of regional supply stress)
- Persian Gulf tanker insurance rates (Lloyd's H&M quotes)
- UAE dirham NDF (depreciates under stress)
- Israeli shekel volatility
- Relative strength of VanEck Oil Services ETF (OIH) vs XLE
Asset impact direction
- Bullish: crude oil, LNG, shipping stocks (BDRY/FRO), defense stocks (LMT/RTX)
- Bearish: airlines (DAL/UAL), petrochemical refiners, emerging-market importers such as INR and KRW
2. Taiwan Strait — Core of the Semiconductor Supply Chain
Strategic significance
- TSMC accounts for roughly 90% of global advanced-node capacity below 5nm
- Taiwan produces about 65% of the world's semiconductors
- It sits on the main southbound route linking Northeast Asia and Southeast Asia
Risk triggers
- Larger-scale Chinese military exercises, especially blockade drills
- U.S. arms sales to Taiwan or high-level official visits
- Major policy changes in cross-strait relations
Key monitoring indicators
- Abnormal weakness in the Philadelphia Semiconductor Index (SOX)
- TSM ADR (TSM) premium / discount in the U.S. market
- Taiwan CDS spreads
- TWD NDF depreciation under stress
- KOSPI, given Korea's semiconductor linkage
- U.S.-listed Chinese ADRs / Hong Kong Hang Seng Tech Index
Asset impact direction
- Bullish: Intel / GlobalFoundries as substitute capacity providers, defense stocks, JPY as a haven
- Bearish: Apple / NVIDIA / AMD / Qualcomm as TSMC clients, TSM ADR, Samsung Electronics
- Extreme scenario: global semiconductor shortage leading to collapse across auto and consumer-electronics supply chains
Supply chain substitution timeline
3-6 months: inventory drawdown, sharp price spikes
6-18 months: partial substitution by Samsung / Intel IDM advanced capacity
2-4 years: ramp-up from TSMC Arizona and Kumamoto Japan
5+ years: Mainland China's independent advanced process catch-up, with major uncertainty
3. Red Sea / Suez Canal — Europe-Asia Trade Artery
Strategic significance
- The Suez Canal carries about 12% of global trade volume and 30% of container shipping
- The alternative route around the Cape of Good Hope adds 10-14 days and raises cost by 15-25%
- Houthi forces in Yemen threaten the Bab el-Mandeb chokepoint
Risk triggers (already validated by the 2024 Houthi attacks)
- Intensified attacks on merchant vessels by Houthi forces
- Israel-Gaza escalation spilling across the region
- Political instability in Eritrea or Somalia
Key monitoring indicators
- Daily changes in the Baltic Dry Index (BDI)
- SCFI Shanghai Containerized Freight Index
- Share prices of Maersk and other container shipping companies
- Share of AIS-tracked vessels rerouting via the Cape of Good Hope (>30% is high alert)
- European TTF natural gas prices, given Red Sea LNG exposure
Asset impact direction
- Bullish: shipping stocks (ZIM/MAERSK/COSCO), tankers rerouting around the Cape (FRO/STNG)
- Bearish: European manufacturers facing supply-chain delays, inflation-sensitive sectors
- Lag effect: higher freight rates → higher global CPI → tighter rate expectations
4. Russia-Ukraine Conflict — Energy and Food Security
Strategic significance
- Russia is the world's largest natural gas exporter and second-largest crude exporter
- Ukraine is a major global grain exporter (wheat / corn / sunflower oil)
- The war has already driven a permanent restructuring of Europe's energy mix
Ongoing risk points
- Escalation in nuclear rhetoric, a major tail-risk driver
- Sanctions expanding to third parties, forcing countries like China and India to choose sides
- Continued attacks on Ukrainian infrastructure such as the power grid and ports
Key monitoring indicators
- European TTF natural gas futures
- Ukrainian sovereign CDS spreads
- RUB/USD exchange rate under sanctions pressure
- Chicago wheat futures (ZW)
- European power prices, e.g. Germany EEX Baseload
- Russian ETF trading status (RSX liquidated; use substitutes)
Sanctions transmission-chain analysis
Sanctions announcement
├── Financial sanctions → SWIFT cutoff → cross-border settlement disruption → emerging-market debt crisis
├── Energy sanctions → European gas spike → industrial energy costs → eurozone recession
├── Export controls → Russia semiconductor / military shortages → weaker war sustainability
└── Grain blockade → Middle East / Africa food stress → political instability → migration pressure
5. South China Sea — Shipping Lanes and Rare-Earth Competition
Strategic significance
- Around one-third of global trade value, roughly USD 3.4 trillion annually, passes through the South China Sea
- China controls about 60% of global rare-earth supply, even more in refining
- Territorial frictions between China and the Philippines / Vietnam persist
Risk triggers
- China declaring an Air Defense Identification Zone (ADIZ)
- Clashes around flashpoints such as Sabina Shoal or Scarborough Shoal
- Rare-earth export bans or quota cuts as a technology retaliation tool against the U.S.
Key monitoring indicators
- Chinese rare-earth futures prices (permanent magnets / praseodymium-neodymium oxide)
- Philippine peso volatility
- Vietnam industrial park REITs / ETFs
- MP Materials (MP) share price as a substitute rare-earth beneficiary
- Share prices of Chinese shipping companies
Asset impact direction
- Bullish: rare-earth miners such as MP Materials and Australia's Lynas, Japanese trading houses with inventories
- Bearish: EV / permanent-magnet motor supply chains, Chinese ADRs
6. Korean Peninsula — Regional Security Shock Source
Strategic significance
- North Korea possesses nuclear weapons and ICBMs, making it a non-trivial tail risk
- Strategic cooperation among China, Russia, and North Korea has deepened, including artillery supply during the Russia-Ukraine war
- South Korea is a major global exporter of semiconductors, shipbuilding, and autos
Risk triggers
- Nuclear or missile tests, especially ICBM launches
- North Korea announcing strategic changes such as "nuclear sharing"
- Political crises in South Korea affecting U.S. force deployment
Key monitoring indicators
- KRW/USD volatility spike
- KOSPI decline
- South Korean CDS spreads
- JPY safe-haven inflows (JPY/USD strength)
- ADR prices of Samsung / SK Hynix
Quantitative Framework for Geopolitical Risk
GPR Index (Caldara & Iacoviello)
Definition and source
- Built by Fed economists Dario Caldara and Matteo Iacoviello
- Computed from war / terror / military-related word frequency in major newspapers globally
- Monthly data back to 1900, covering global and country-specific series
- Official data: https://www.matteoiacoviello.com/gpr.htm
Index taxonomy
GPR: overall geopolitical risk
GPRT: geopolitical threats (forward-looking)
GPRA: geopolitical acts (events already realized)
GPR_country: country-level sub-index
Python example
import pandas as pd
import requests
def load_gpr_index():
"""Load the official GPR Index data.
Returns:
pd.DataFrame: Monthly GPR data with columns such as GPR, GPRT, and GPRA.
"""
url = "https://www.matteoiacoviello.com/gpr_files/data_gpr_export.xls"
df = pd.read_excel(url, index_col=0, parse_dates=True)
return df
def gpr_signal(df, window=12, threshold=1.5):
"""Generate abnormal GPR signals.
Args:
df: DataFrame containing GPR data
window: Rolling mean window in months
threshold: Z-score trigger threshold in standard deviations
Returns:
pd.Series: Boolean signal where True means high-risk state
"""
gpr = df["GPR"]
rolling_mean = gpr.rolling(window).mean()
rolling_std = gpr.rolling(window).std()
z_score = (gpr - rolling_mean) / rolling_std
return z_score > threshold
Calculating War Risk Premiums
Oil war premium
def oil_war_premium(spot_price, mean_5y_price, supply_disruption_prob,
disruption_magnitude_pct):
"""Estimate the war-risk premium embedded in crude oil.
Method:
A simplified model based on expected supply-disruption value.
Args:
spot_price: Current spot price in USD/bbl
mean_5y_price: Five-year average price as the "no-risk" baseline
supply_disruption_prob: Probability of supply disruption in [0, 1]
disruption_magnitude_pct: Price impact of disruption in [0, 1]
Returns:
float: Estimated war premium in USD/bbl
"""
expected_disruption_premium = (
mean_5y_price * disruption_magnitude_pct * supply_disruption_prob
)
observed_premium = spot_price - mean_5y_price
return max(0, min(observed_premium, expected_disruption_premium))
Gold safe-haven premium
def gold_geopolitical_premium(gold_price, real_yield_10y, usd_index):
"""Decompose the geopolitical premium component in gold prices.
Args:
gold_price: Spot gold price in USD/oz
real_yield_10y: 10-year real yield in percent
usd_index: DXY index
Returns:
float: Geopolitical premium as the residual component
"""
import numpy as np
fundamental_value = 2000 - 800 * real_yield_10y - 15 * (usd_index - 100)
return gold_price - fundamental_value
Supply-Chain Disruption Probability Assessment
Bayesian update framework
def update_disruption_probability(prior_prob, new_event_severity, base_rate=0.05):
"""Update supply-chain disruption probability using a new event.
This is a simplified Bayesian update that adjusts the prior
using the severity of the new event.
Args:
prior_prob: Prior disruption probability
new_event_severity: Event severity in [0, 1]
0.0 = diplomatic friction
0.3 = military standoff
0.6 = local conflict
1.0 = full-scale war
base_rate: Historical annualized baseline disruption rate
Returns:
float: Updated disruption probability
"""
likelihood_ratio = 1 + 9 * new_event_severity
posterior = (prior_prob * likelihood_ratio) / (
prior_prob * likelihood_ratio + (1 - prior_prob)
)
return posterior
Quantifying Sanctions Transmission Chains
Sanctions intensity scorecard
| Sanction Type | Intensity Score | Typical Asset Shock | Expected Duration |
|---|
| Targeted sanctions on people / entities | 1-2 | <0.5% | Short-lived |
| Sector-level export controls | 3-4 | 1-3% | Several months |
| SWIFT cutoff | 7-8 | 5-15% | Long-lasting |
| Full-scale economic sanctions | 9-10 | 10-30% | Structural |
| Oil embargo | 8-9 | Crude +10-30% | Medium-term |
Asset-Class Impact Mapping
Energy
| Asset | Hormuz | Russia-Ukraine | Red Sea | Notes |
|---|
| Brent crude | +++ shock | ++ persistent | + mild | Primary geopolitical-risk asset |
| WTI crude | ++ shock | ++ persistent | + mild | Widens against Brent |
| Europe TTF gas | ++ | +++ | + | Cost of replacing Russian gas |
| LNG futures | +++ | ++ | ++ | Red Sea disruption matters for Asian LNG |
| Relevant ETFs | XLE, OIH, UNG | | | |
Precious Metals (Safe Haven Function)
Gold (GLD/GC): geopolitical shock → immediate rally, but persistence depends on real-rate direction
Silver (SLV/SI): industrial exposure dilutes safe-haven behavior and raises volatility
Palladium / platinum: Russia is a major producer, so sanctions hit supply directly
Empirical patterns (2001-2024)
- A 1-standard-deviation rise in GPR implies about +1.2% expected gold return over a 1-month window
- On day one of major shocks such as Pearl Harbor, 9/11, or Russia-Ukraine, gold rose roughly 3-8%
- Within 60 days, around 50-70% of the geopolitical premium mean-reverts
Agriculture
| Asset | Russia-Ukraine Conflict | South China Sea Blockade | Driver |
|---|
| Wheat (ZW) | +++ | + | Russia + Ukraine account for about 30% of exports |
| Corn (ZC) | ++ | + | Ukraine is a major exporter |
| Sunflower oil | +++ | - | Ukraine accounts for roughly 50% globally |
| Soybeans (ZS) | + | + | China import demand |
Semiconductors / Technology
Estimated impact under a Taiwan Strait crisis:
- Mild military tension (drills): SOX -5% to -10%
- Blockade drill (1 month): SOX -15% to -25%
- Actual military conflict: SOX -40% to -60% (no true historical analogue)
Beneficiaries through substitution:
- Intel (INTC): IDM model with U.S.-based capacity
- GlobalFoundries (GFS): U.S. / Europe / Singapore capacity
- Samsung, though Korea itself is also a geopolitical risk zone
Shipping / Logistics
Key ETFs and stocks:
- BDRY: bulk-shipping freight ETF tracking BDI, highly sensitive to Red Sea / Hormuz shocks
- ZIM: Israeli container shipper, directly exposed to Red Sea risk
- FRO (Frontline): tanker beneficiary of Hormuz risk
- STNG (Scorpio Tankers): benefits from rerouting around the Red Sea
- MAERSK.B: container-shipping leader that benefits from freight spikes during crises
Defense
U.S. defense ETFs: ITA (iShares), XAR (SPDR)
Single-stock beneficiaries of geopolitical risk:
- LMT (Lockheed Martin): F-35, missile systems
- RTX (Raytheon): air-defense systems such as Patriot
- NOC (Northrop Grumman): B-21 bomber, nuclear systems
- BA (Boeing): military exposure, though commercial aviation can be hurt by geopolitics
Historical pattern:
Higher geopolitical risk → faster defense budget approvals → effect shows up with a 6-12 month lag
FX (Safe-Haven Currencies)
Capital flows during crises:
Risk currencies (AUD/NZD/MXN/KRW/BRL) → outflows
Safe-haven currencies (JPY/CHF/USD) ← inflows
JPY:
- Net-creditor-nation status + repatriation effect
- Historical crisis moves: +1% to +3% vs USD
CHF:
- Neutral country + European financial center
- Major crises: +2% to +5% vs EUR
USD:
- Global reserve currency and final safe haven during crises
- But if the U.S. homeland is directly attacked, USD can weaken instead
Note: High-carry funding currencies such as TRY and ARS tend to suffer the most when global risk aversion rises
Event-Driven Strategy Framework
Phase 1: Positioning Before the Crisis (Early-Warning Signal Detection)
Signal classification system
SIGNAL_LEVELS = {
"GREEN": {
"desc": "Normal geopolitical risk level",
"gpr_percentile": (0, 50),
"action": "Standard allocation, no special hedge required"
},
"YELLOW": {
"desc": "Risk rising, watch for escalation",
"gpr_percentile": (50, 75),
"action": "Small long-gold position, reduce high-risk asset exposure by 10%"
},
"ORANGE": {
"desc": "High-risk state, potential shock approaching",
"gpr_percentile": (75, 90),
"action": "Add safe-haven assets, buy OTM protective options, bullish on oil"
},
"RED": {
"desc": "Extreme risk, crisis may break out",
"gpr_percentile": (90, 100),
"action": "Maximize defensive positioning, hold cash / gold / Treasuries, short high-risk assets"
}
}
Early-warning checklist
Diplomatic:
[ ] Embassy closures / downgrades
[ ] Diplomat expulsions
[ ] UN emergency meeting called
[ ] Escalation in joint statements by multiple countries
Military:
[ ] Large-scale exercises (>50,000 personnel)
[ ] Carrier strike group forward deployment
[ ] Higher readiness announcements
[ ] Missile / nuclear system release orders
Financial:
[ ] Target-country CDS spread breaks historical highs
[ ] Exchange rate devaluation >3% in one week
[ ] Sharp decline in FX reserves
[ ] Accelerating capital flight
Phase 2: Trading During the Crisis
Volatility trading framework
def crisis_vol_strategy(underlying, option_chain):
"""Volatility trading framework during crises.
Crisis outbreaks usually cause:
1. A short-term VIX spike (long VIX futures / options)
2. Inversion in the IV term structure (front month > back month)
3. Steeper put skew
Args:
underlying: Underlying asset ticker
option_chain: Option chain data
Returns:
dict: Recommended strategies and sizing guidance
"""
strategies = {
"long_vix_futures": {
"instrument": "Front-month VX futures",
"trigger": "VIX < 20 and GPR > 75th percentile",
"target": "VIX spikes to 35-50",
"stop": "VIX falls 15% below entry"
},
"backspread": {
"instrument": f"Buy OTM Put + sell ATM Put on {underlying}",
"trigger": "Implied volatility is at a historical low",
"profit_zone": "Large drop > 10%"
},
"calendar_spread": {
"instrument": "Sell near-month ATM + buy far-month ATM",
"trigger": "Exit when term-structure inversion becomes excessive",
"profit_zone": "Volatility mean reversion"
}
}
return strategies
Crisis allocation matrix
Crisis type | Gold | Oil | Defense | JPY | Treasuries | EM
Energy conflict | ++ | +++ | ++ | + | + | ---
Nuclear escalation | +++ | + | + | +++ | +++ | ---
Sanctions / trade | + | + | + | + | + | --
Food crisis | + | 0 | 0 | 0 | + | -- (importers)
Sea blockade | + | ++ | + | + | + | -
Phase 3: Mean Reversion After the Crisis
Recovery time of historical events
| Event | S&P 500 Max Drawdown | Days to Recover Prior High | Max Oil Rally | Max Gold Rally |
|---|
| 9/11 attacks (2001) | -11.6% | 31 days | -35% (demand collapse) | +5% |
| Iraq War (2003) | -3% | <30 days | +40% (within 1 year) | +15% |
| Russia-Georgia War (2008) | <-5% | <30 days | Overlapped with financial crisis | +10% |
| Crimea (2014) | -1% | 7 days | -5% | +3% |
| Full invasion of Ukraine (2022) | -3% briefly | <20 days | +40% (within 3 months) | +5% |
Core patterns
1. The initial equity shock from geopolitical events usually recovers within 30 days unless recession hits simultaneously
2. Energy / commodities effects last longer because supply-side changes are structural
3. Go long the most damaged assets once the crisis de-escalates and mean reversion starts
4. Sell safe-haven assets that exploded during the crisis, especially gold after tension fades
Mean-reversion signals
REVERSION_SIGNALS = [
"Ceasefire agreement signed / negotiations announced",
"Energy / grain exports resume, confirmed by shipping data",
"Target-country CDS spreads retrace >20% from the peak",
"GPR Index falls >30% from the peak",
"VIX drops below 20 after peaking",
"Safe-haven currencies such as JPY / CHF begin weakening"
]
Data Sources and APIs
1. GPR Index (Most Important Quantitative Dataset)
GPR_DATA_URL = "https://www.matteoiacoviello.com/gpr_files/data_gpr_export.xls"
2. GDELT Global Event Database (Free)
def query_gdelt_events(country_code, event_type, start_date, end_date):
"""Query GDELT geopolitical event data.
GDELT BigQuery table: gdelt-bq.gdeltv2.events
CAMEO root codes: 14=protest, 18=assault, 19=fight, 20=mass violence
Args:
country_code: FIPS country code, e.g. 'CH' for China, 'RS' for Russia
event_type: CAMEO root code
start_date: Start date in YYYY-MM-DD
end_date: End date in YYYY-MM-DD
Returns:
pd.DataFrame: Event records
"""
from google.cloud import bigquery
client = bigquery.Client()
query = f"""
SELECT SQLDATE, Actor1CountryCode, Actor2CountryCode,
EventCode, GoldsteinScale, NumMentions, AvgTone
FROM `gdelt-bq.gdeltv2.events`
WHERE (Actor1CountryCode = '{country_code}'
OR Actor2CountryCode = '{country_code}')
AND EventRootCode = '{event_type}'
AND SQLDATE BETWEEN '{start_date.replace('-','')}'
AND '{end_date.replace('-','')}'
ORDER BY SQLDATE DESC
"""
return client.query(query).to_dataframe()
3. ACLED Armed Conflict Location & Event Data
ACLED_API_BASE = "https://api.acleddata.com/acled/read"
def fetch_acled_events(country, start_date, end_date, api_key):
"""Fetch ACLED armed-conflict event data.
Args:
country: Country name in English
start_date: Start date in YYYY-MM-DD
end_date: End date in YYYY-MM-DD
api_key: ACLED API key
Returns:
pd.DataFrame: Conflict event data
"""
import requests
import pandas as pd
params = {
"key": api_key,
"email": "your@email.com",
"country": country,
"event_date": f"{start_date}|{end_date}",
"event_date_where": "BETWEEN",
"export_type": "json"
}
resp = requests.get(ACLED_API_BASE, params=params)
return pd.DataFrame(resp.json()["data"])
4. Real-Time News Sentiment Analysis
def analyze_geopolitical_news(query: str) -> dict:
"""Read news through Jina and analyze geopolitical-risk sentiment.
Use together with the agent's read_url tool.
Args:
query: Search keywords
Returns:
dict: Sentiment-analysis result
"""
news_sources = [
"https://www.reuters.com/world/",
"https://www.bloomberg.com/politics",
"https://www.ft.com/world",
"https://www.foreignpolicy.com/"
]
5. Other Practical Data Sources
DATA_SOURCES = {
"oil_tanker_tracking": {
"desc": "Crude oil / LNG vessel AIS tracking",
"source": "MarineTraffic API (paid) / VesselFinder (limited free)",
"use_case": "Real-time monitoring of traffic through Hormuz / the Red Sea"
},
"un_vote_data": {
"desc": "UN General Assembly / Security Council voting records",
"source": "UN Data API (free)",
"use_case": "Track changes in great-power alignment"
},
"arms_transfer": {
"desc": "Arms transfers and military aid data",
"source": "SIPRI Arms Transfers Database (free)",
"use_case": "Estimate conflict-escalation probability"
},
"nuclear_risk": {
"desc": "Real-time nuclear-risk assessment",
"source": "Bulletin of the Atomic Scientists Doomsday Clock",
"use_case": "Tail-risk monitoring"
},
"commodity_futures": {
"desc": "Commodity futures prices, including geopolitical premium",
"source": "Integrated in this project: Tushare commodity futures / OKX crypto",
"use_case": "Estimate war premium"
}
}
Application Scenarios
Scenario 1: Geopolitical Risk Dashboard (Monthly Refresh)
Run at the start of each month:
1. Download the latest GPR Index data
2. Calculate CDS spread changes for each hotspot country
3. Analyze tanker insurance rates
4. Summarize counts of high-intensity GDELT conflict events
5. Output a composite risk score (0-100) plus allocation guidance
Scenario 2: Rapid Event Shock Assessment
Trigger:
Major geopolitical event breaks out, such as a missile strike or sanctions announcement
Execution flow:
1. Identify the event type and intensity (0-10)
2. Map the affected asset classes
3. Estimate the short-term price shock range
4. Identify hedging instruments (options / futures / ETFs)
5. Set stop-loss rules and position size
Scenario 3: Quarterly Risk Stress Testing
SCENARIOS = {
"hormuz_blockade_30d": {
"oil_price_shock": +40,
"gold_shock": +8,
"equity_shock": -12,
"usd_shock": +3,
"description": "30-day Strait of Hormuz blockade scenario"
},
"taiwan_conflict_mild": {
"semioconductor_shock": -25,
"gold_shock": +5,
"equity_shock": -15,
"jpy_shock": +8,
"description": "Mild Taiwan Strait military conflict scenario"
},
"russia_gas_cutoff": {
"eu_natgas_shock": +80,
"eu_equity_shock": -20,
"eur_shock": -8,
"gold_shock": +6,
"description": "Russia fully cuts off gas to Europe"
}
}
def portfolio_stress_test(portfolio_weights, scenarios=SCENARIOS):
"""Run geopolitical scenario stress tests on a portfolio.
Args:
portfolio_weights: dict mapping asset ticker to weight
scenarios: Scenario-definition dictionary
Returns:
pd.DataFrame: Expected portfolio PnL under each scenario
"""
results = {}
for scenario_name, shocks in scenarios.items():
portfolio_pnl = sum(
portfolio_weights.get(asset, 0) * shock / 100
for asset, shock in shocks.items()
if asset != "description"
)
results[scenario_name] = {
"portfolio_return": portfolio_pnl,
"description": shocks["description"]
}
return results
Scenario 4: Backtest of a GPR-Driven Dynamic Hedge
def gpr_dynamic_hedge_backtest(returns_data, gpr_data,
hedge_assets=["GLD", "USO"],
hedge_weight=0.05):
"""Backtest a GPR-driven dynamic hedge strategy.
Args:
returns_data: pd.DataFrame of daily asset returns
gpr_data: pd.Series of monthly GPR Index values
hedge_assets: List of hedge assets
hedge_weight: Allocation weight per hedge asset
Returns:
pd.DataFrame: Return comparison before and after hedging
"""
import pandas as pd
gpr_daily = gpr_data.resample("D").ffill()
gpr_threshold = gpr_daily.quantile(0.75)
hedge_signal = gpr_daily > gpr_threshold
base_return = returns_data.drop(columns=hedge_assets, errors="ignore").mean(axis=1)
hedge_return = returns_data[hedge_assets].mean(axis=1) if hedge_assets else 0
hedged_return = base_return.copy()
hedged_return[hedge_signal] = (
base_return[hedge_signal] * (1 - len(hedge_assets) * hedge_weight) +
hedge_return[hedge_signal] * len(hedge_assets) * hedge_weight
)
return pd.DataFrame({
"base": base_return,
"hedged": hedged_return,
"hedge_active": hedge_signal.astype(int)
})
References and Further Reading
Academic papers:
- Caldara & Iacoviello (2022), "Measuring Geopolitical Risk", AER
- Apergis et al. (2021), "Geopolitical Risks and Asset Prices"
- Mueller & Rauh (2018), "The Hard Problem of Prediction for Conflict Prevention"
Data resources:
- GPR Index: https://www.matteoiacoviello.com/gpr.htm
- GDELT: https://www.gdeltproject.org/
- ACLED: https://acleddata.com/
- SIPRI: https://www.sipri.org/databases
Market-analysis tools:
- BDI (Baltic Dry Index): https://www.balticexchange.com/
- CDS spread data: Bloomberg / Refinitiv (paid) / FRED (partially free)
- Vessel AIS tracking: MarineTraffic.com
